5 tips to diversify your crypto portfolio today
Protect your portfolio with these pointers on crypto diversification
Millions of people are looking at cryptocurrency as an investment opportunity in 2022. Holding a range of virtual assets can help protect your investment against price corrections affecting individual coins or tokens. This guide offers five protips to help you diversify your crypto portfolio and take advantage of the market.
Disclaimer: This page is not financial advice or an endorsement of digital assets, providers or services. Digital assets are volatile and risky, and past performance is no guarantee of future results. Potential regulations or policies can affect their availability and services provided. Talk with a financial professional before making a decision. Finder or the author may own cryptocurrency discussed on this page.
Diversify by coin type
A good way to start diversifying your portfolio is by allocating money toward various coin types. A number of crypto types are available for investment in today’s market. The most common options include peer-to-peer (P2P) payment coins, smart contract coins and stablecoins.
P2P
Cryptocurrencies allow for people to transact without the need for a centralized intermediary like a bank. P2P transactions are one of the essential use cases for crypto.
The acceptance of cryptocurrency has grown considerably in the last few years. You can now use cryptocurrencies to pay for everyday goods and services, ranging from your morning coffee to newspaper subscriptions to real estate. Bitcoin was even adopted as legal tender by El Salvador in 2021 and by the Central African Republic in 2022.
Smart contract coins
Coins that power smart contract platforms, like Ethereum, have gained a lot of traction recently. Smart contracts are simply agreements, executed by code, that allow for automated transactions between anonymous parties. The networks that use them offer developers a platform to build decentralized applications — more commonly called dApps — on top of. An example of a popular dApp built on the Ethereum network is Uniswap, a decentralized exchange for swapping tokens that use Ethereum’s ERC-20 standard. The Ethereum network is powered by its native coin, Ether (ETH), which is used as an incentive for miners to process transactions. ETH is currently the second-largest coin by market cap.
Stablecoins
In a class of their own, stablecoins, like TrueUSD (TUSD), are often pegged to the value of existing currencies, like the US dollar, shielding holders from crypto market volatility. The price of a stablecoin may also be tied to precious metals or even oil reserves.
If you’re unsure which coin types to diversify into, check out eToro’s social trading features. With social trading, you can discover other traders with similar investing needs to your own and even copy the trades of popular investors on the platform.
Diversify by past success
Another way to go about diversifying your crypto portfolio is by looking into the past success of various coins. 2021 saw the rise of a number of altcoins reaching staggering heights.
One altcoin that saw tremendous gains in the past year is Shiba Inu (SHIB). SHIB is a memecoin, originally called the “Dogecoin killer,” but it also functions as the native token of the ShibaSwap exchange.
Solana (SOL) is another coin whose value has grown considerably. SOL is the native currency powering Solana’s blockchain. With its fast transaction speeds and low fees, Solana aims to challenge Ethereum as the top smart contract platform for developers.
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Diversify by Industry
Holding assets from varying industries in the space is yet another way to help round out your crypto portfolio. By diversifying, you may be able to shield a portion of your investments from depreciation when a single industry experiences bouts of volatility.
Non-fungible tokens (NFTs) are an example of a growing crypto industry you can invest in. These one-of-a-kind digital assets — often represented by works of art — store identifying information, such as ownership, on their associated blockchain.
NFTs are doing well as a nascent crypto industry, its market surpassing $40 billion in 2021. And with institutions rapidly adopting the technology as a means of authentication, there’s a strong expectation for future growth.
Diversify by geography
Cryptocurrencies are a global phenomenon. Diversifying based on their popularity in various locations may help mitigate regional disruptions to market prices.
The cryptocurrency market operates 24 hours a day. People on one side of the world start trading while the other side sleeps. Picking a coin that trades heavily in a foreign country may sound risky if you’re unfamiliar with the protocol. Double-checking a metric like eToro’s risk score can help you make a confident choice.
While Bitcoin and Ethereum are among the most popular cryptocurrencies globally, preferences change by location as you work your way down the list of available altcoins. In the US, Dogecoin is the third most popular coin held by investors, according to a recent Finder report. In Singapore, however, that position is held by Cardano (ADA).
Diversify with an ETF
An exchange traded fund (ETF) can track the performance of stock market indexes, as well as specific assets like Bitcoin. Investing in ETFs is a way to diversify your portfolio. With a single security, an investor can gain exposure to multiple stocks within an industry.
First established in 1990, ETFs are similar to mutual funds. But unlike mutual funds, ETFs are traded on the stock market and generally considered a more passive investment vehicle. To buy or sell an ETF, investors must create an account with a broker or investment platform.
With low minimum investments, eToro simplifies investing in ETFs for anyone with an account. This ease of access has helped ETFs become a popular investment in recent years.
You can invest across multiple asset classes with eToro, including a growing number of cryptocurrencies.
Investment strategies for diversification
With a range of assets making up your portfolio, you can mitigate some of the risk associated with the inevitable price fluctuations of any one coin or token. But despite the benefits of crypto diversification, spreading assets across too wide a range can be redundant — even counterproductive. An investment strategy like dollar-cost-averaging can help you achieve a more balanced portfolio. Dollar-cost-averaging entails buying smaller amounts of specific cryptocurrencies as market prices fluctuate, allowing your assets to reach their intended levels over time.
However you choose to invest, diversifying across crypto assets can help protect your portfolio into the future. Looking into the various types of cryptocurrencies, you can use their track records, industries and geographies as a guide toward a diversification strategy that aligns with your personal investment goals.
