When considering investing, diversification is essential. Yet, there appears a question: what’s the importance of diversification?
Firstly, diversifying cryptocurrencies means allocating your funds in different crypto-assets to reduce the risk, spreading it around. As a result, if one asset’s value decreases, you lose only a part of your money.
When considering cryptocurrencies diversification, people have some difficulties for 2 main reasons. First, the absence of required information – people don’t know what problems different projects solve, or which crypto-assets to choose.
Second, it’s quite tricky for them – lots of exchanges with diverse user interfaces and various registration requirements make it complicated for users to understand plus orientate in crypto diversification. In any case, whether you decide to diversify your portfolio or not, to easily manage your crypto investments, you need a cryptocurrency portfolio tracker.
Coming back to diversification, let’s determine how to diversify crypto portfolio.
In crypto diversification, you should consider several aspects. First, their types. Cryptocurrencies have 3 main types: traditional, platform cryptocurrencies and utility tokens.
Other essential factors are circulating and total supply, along with a market cap of a crypto coin. Crypto assets with higher market cap, such as Bitcoin, are quite a bit more stable. Therefore, the possibility the value of this kind of coin will fluctuate dramatically is almost equal zero.
According to several investors, the best strategy is diversifying through digital assets with low, medium and high market caps. In addition, combining this with properly selected crypto-asset, you can have a well-balanced crypto portfolio.
However, some can cast doubts on the point that crypto portfolio diversification can reduce the risk, as the top crypto-assets are very closely correlated with Bitcoin and the idea of diversifying becomes nonsense.
There’s a lot of disinformation about cryptocurrency and one of them is about the BTC dominance in crypto market. At press time, BTC dominance is 64.9%, with a total market cap of $228,903,919,218 (Coinmarketcap).
If we take a look at ETH and XRP prices within 2016-2018, we can see significant correlation with Bitcoin prices. BTC price correlation was 0.954 for LTC, 0.916 for ETH, and 0.836 for XRP within 2016-2018. When we compare two items, normally, any number between 0.7 to 1.0 indicates a high positive correlation, during which when the number of one item grows, the other one increases, and the contrary.
Though, despite the present quite high correlation and the fact that Bitcoin is driving the crypto market, at some point other cryptocurrencies will start having an impact on this market, as well.
Summarizing: It’s better to get diversified the portfolio in any way because having diversified portfolio, you will win in the long run, if don’t diversify you can win on the short term run but not for the long term. In any case, in investing and trading you will always need crypto trackers. To find out the best crypto tracking tools, check this instructive best cryptocurrency portfolio tracker tools guide.
