Diversifying Your Portfolio – Part 2
Diversifying Your Cryptocurrency Portfolio – Part 2
To help you make informed decisions when investing in cryptocurrency, we’ve developed #CryptoInsights, a series of articles designed to give you all the information you need to optimise the value of your portfolio. If you have any questions about the #CryptoInsights, the Coinage Exchange or anything else Crypto related, feel free to get in touch with us.
Recently, we wrote about how you can diversify your cryptocurrency profile and minimise your exposure to fluctuating prices.
In part 2 of this series, we’ll be focusing on how to differentiate between alternative coins based on type, as well as discussing how to successfully diversify through primary risk analysis.
You can check out part 1 here if you haven’t already, or read on to further diversify your crypto portfolio.
The Type of Coin
Diversifying your portfolio is all about managing risk. One of the simplest ways to achieve this is by identifying a coin’s risk level and allocating segments of your portfolio accordingly – something we touched on in Part 1. However, that is only a basic foundation for diversification. There are other important factors to consider, as well as a coin’s basic risk level, such as the type of coin.
The type of a coin refers to what category the coin falls under when looking at what the coin was created to accomplish. Take, for example, Bitcoin. Bitcoin would fall under thetransactionalcoins category, as it was designed as an open-source P2P payment network.
There are other coins which also fall into the same category as Bitcoin, however many other cryptocurrencies are multi-purpose and were created for reasons other than to facilitate payments.
Always Consider Risk Management
So why bother categorizing each coin? Again this all comes back to minimizing risk, while also maximizing potential reward. Oftentimes, surges in different industries will cause certain currencies to experience price action in unison. This is in part due to the market being vulnerable to emotional trading based on public sentiment.
A positive shift in attitude towards supply chain coinscould see significant gains for coins under that category, whereas a negative change towards privacy coinscould see substantial losses in this area. You don’t want to be going down with the ship if supply chain coins perform exceptionally poorly in the coming year.
It is also important to remember thatcoins under the same category are often competing with each other. Many coins have purposes that are unique; however the majority will also have competitors in the same field which are fighting for a finite market share. In such cases, the rise of a competitor could mean the demise of another, which would lead to inverse price action within a category.
By spreading your portfolio across different types, you can limit your exposure to competitive price action which would otherwise subdue portfolio gains. This will avoid being in a situation where the rise of one of your coins is always leading to the downfall of another coin you hold simply because they are competitors.
Once again, we must mention the dangers of over-diversification,as this is a risk with any method of diversification. The market has ups and downs for every type of coin, and by spreading yourself too thin, you will find that as one category increases a surge in price, another will experience a downturn – leaving your portfolio static.
Over-diversifying goes too far in minimizing the risk – reward ratio and should be avoided. It is crucial to research the different types of coins and focus on the types you believe will have the most growth and success in the time to come in order to maximize your future rewards!
What Types Are There?
It is difficult to classify each coin within a static category purely because the majority of coins nowadays are multi-purpose and aren’t limited to a single use case. That being said, we have listed and explained some basic categories which are a good starting point for thinking about a coin’s usage.
Transactional cryptocurrencies typically only have one purpose in mind: to make peer-to-peer payments quickly and cheaply. Bitcoin is the original transactional cryptocurrency however many more have been created since. Others include:
- Bitcoin Cash
These are similar, but noticeably different, to transactional cryptocurrencies as finance-technology cryptos focus more on the world of finance and banking as opposed to individuals. These coins usually focus on improving the banking world as well as the efficiency and access to our financial services. Some focus on investing, some focus on lending and others focus on moving vast sums of money around. Examples include:
- Stellar Lumens
As the name would suggest, privacy coins focus on maintaining a level of anonymity when trading. By making all transactions untraceable, privacy coins are fungible and are the cryptocurrency market’s first defence against government regulation and intervention. Examples of privacy coins are:
Coins in this category are used to build other projects and decentralized apps which utilize smart contracts. It is important to note that projects built on these types of coins which then have their own cryptocurrency are called tokens and often experience price action similar to their founding platform due to the inherent connection they possess. For instance, a crash in the price of Ethereum is likely to impact the price of Ethereum tokens negatively. Some coins include:
Supply chain coins focus on managing and tracking products as they make their way across the supply chain. This often begins with the product’s raw materials and ends with the product reaching the consumer, and allows for a much greater degree of management and control about where a product has been and what condition it is in. Examples include:
- Walton Chain
Many cryptocurrency exchanges now utilize their own coin which can offer either trading discounts or can be used as fees for that specific exchange. These coins can often be comparatively safe investments – provided the exchange they are specific to is successful. Some examples are:
- Binance Coin
- Bibox Token
- Kucoin Shares
Too Many Types To List
The six categories mentioned above represent only a fraction of what cryptocurrencies as a whole offer. It is vital to have a basic understanding of what utility each coin you invest in has as this will form another layer in the diversification of your portfolio. By researching different coins’ utilities, you will be able to find which types of cryptocurrencies have the best use cases, and in turn, best potential for growth.
Don’t be afraid to try out different strategies when it comes to diversifying, as it is essential you find your own unique balance. Finding this balance is the key to long-term portfolio growth.
- #CryptoInsights: The Bubble Doesn’t Matter – The Technology Does
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- #CryptoInsights: Is the Crypto Market Hindered by a Lack of Liquidity?
- #CryptoInsights: Diversifying Your Portfolio – Part 2
- #CryptoInsights: Diversifying Your Portfolio – Part 1
In this edition of the #CryptoEssentials, we take a look at what are Privacy coins and do you need them? … Read More