Successful investors know that over time it is not a good idea to put all your eggs in one basket. In Cryptocurrency this becomes even more important when we are still in the early stages of the technology. 2018 saw All Time High’s for many coins and then over 90% crashes in prices. Many ICO’s that came out are trading below their ICO price.
When it comes to Cryptocurrency people may just associate Crypto with Bitcoin but there are a wide variety of crypto that differ in their intended use.
If you are involved with Cryptocurrency the approach I take is to diversify within the asset class. Bitcoin and Ethereum are nice and easy to get into as a first step but then a wide range of options exist to further diversify into.
Diversification is a risk mitigation strategy that should be part of everyone’s investment approach.
So how do you diversify in Crypto?
The Use Cases
Cryptocurrencies differ from each other and their intended use. Comparing Bitcoin to Ethereum is a common mistake many people are making. They do not necessarily compete for the same users.
When deciding on if you want to be involved with cryptocurrencies and to add these into your investment portfolio what should you then look at? First of all crypto’s are probably the riskiest asset class available today. This does not mean however that all cryptocurrencies carry equal risks. Some are riskier than others. How I decide to de-risk my portfolio is to spread out and hold a variety of coins that have different Use Cases. I don’t want all my eggs in one basket.
Let us look at the various types of cryptocurrencies and the areas they fall under. I won’t list all of the Coins in each because there are thousands and most should be considered junk. Instead I’ll just mention a few of the bigger marketcap coins so you get an idea of what i’m on about:
- Store of Value — Bitcoin, Digix
- World Computer- Ethereum, NEO, EOS, Cardano, Tron
- Payment Rail- XRP, Stellar, Bitcoin Cash, Monero, Dash
- Connected IoT — IOTA
- Cloud Storage — Siacoin, Storj
- DAPPs- Basic Attention Token, Steem, Augur, Funfair
- Stable Coin- Tether, PAX, DAI, USD Coin, Gemini Dollar
- Decentralised Finance- Maker
- Cryptocurrency Exchange Utility Tokens- Binance Coin, Kucoin, Qash
- Tradeable Digital Assets — WAX
From the above, a well balanced Crypto portfolio would not just include Ethereum, NEO, EOS, Cardano and Tron since these fall into the World Computer category. If you really believe however that Blockchains killer use case is as a World Computer then by all means you could put all your eggs in this basket.
Instead an arguably less risky and diversified portfolio would include: Bitcoin, Ethereum, XRP, Augur, Maker and Iota because the coins are spread out in differing use cases.
So far we have just looked at Use Cases but within those there are even further separations that can be had.
Even when looking at the Use Cases of a crypto there are still thousands of coins to look at. To further decide on which is a good investment you can look at each coin to determine:
- Are they in vaporware or in actual production stage? A blockchain which is more than just a white paper is less of a risk than something that may or not be implemented. Exit scams are becoming a bigger issue in the blockchain space so due diligence shouldn’t be taken lightly.
- How many current users on the network compared to future potential? Just because a Blockchain has a loud and vocal CEO does not necessarily translate to actual user numbers on the network. Educate yourself on if there are actual people using the network or if it’s just being hyped. With sites like Dappradar you can see data related to usage.
- Developer numbers working on the protocol or application. A larger developer base and community means the project is being taken seriously. The developers will work to improve the technology. Some projects will be naturally abandoned as time goes on. With a larger amount of people contributing and committing code to the project the safer it becomes. Check out the Github of a project to get an indication of how many are contributing.
- Is the team backed by other noteworthy investors? Big VC players that are involved with a project have surely done their due diligence. Piggy back off of their research.
- How liquid is the token? Don’t get left holding a bag with a token that is not tradeable. The more exchanges that offer trading the less chances of the token being illiquid. Beware that ICO’s are starting to run into issues with getting their coin listed on reputable exchanges.
A diversified Portfolio
After deciding on which Use Cases I really believe in and then further looking into each coin in detail I can finally come up with what I think is a diversified cryptocurrency portfolio.
Here are some guidelines of how different portfolio’s suit different people’s situation. Please note these are just examples and not investment advice. Don’t buy a coin just because I have mentioned it.
I Have No Clue — 10/10/10/10/10/10/10/10/10/10
For the person who has no idea what blockchains are and are not biased towards any particular use case. They think each coin has an equal chance of success because they have no clue what is what. Pick 10 coins from 10 use cases and hold 10% in each.
Bitcoin or Ethereum Maximalist — 80/20
These people are either a Bitcoin or Ethereum maximalist and believe all other altcoins are shitcoins. Hold 80% in Bitcoin and 20% in Ether. Or the other way around at 80% in Ether and 20% in Bitcoin. Disregard any other Coins no matter how much they are shilled. After all Bitcoin and Ethereum have the biggest development communities. In time they will expand into other use cases.
Conservative Diversified -60/20/5/5/5/5
Have read up on and spent many hours on reddit researching various projects. Believe I have a fair amount of knowledge when it comes to distinguishing between what an Altcoin and a Shitcoin is. Smart Contracts are the best thing since sliced bread. I put 60% in Ethereum or Bitcoin, 20% in Bitcoin or Ethereum and 5 other coins that are in the top 10 in marketcap. The 5 are not competing in the same use case.
The Whale — 70/10/1/1/1/1/1/1/1/1/1/1/1/1/1….
Rode the Bitcoin or the Ethereum rocket ship back before 2016. Saw how gainz could be made with altcoins after 2016 and suffer from FOMO. To not miss out on the next big thing and because I can afford to diversify into high risk coins I invest small amounts into many many alts. New and exciting projects that show potential will be bought into.
I Live in Zimbabwe/Iran/Venezuela- 100
Get yo hands on any of the stable coins!
Decide on how your portfolio currently looks and if you should leave things as is or if a rebalance is due. You have decided to be involved with the riskiest asset class so be proactive in managing your crypto portfolio.