Crypto Asset Diversification – ALTCOIN MAGAZINE

In this article, we will study some possible cases of crypto portfolio diversification from a HODLer perspective, meaning diversifying investment by allocating capital into various crypto assets using long-only strategies. We will also explore how altcoins and stablecoins could balance a portfolio.

In the traditional world of finance, the performance of different assets could be various under different market conditions. For example, REITs could outperform general equities in a turbulence market, and defensive stocks could disappoint investors when risk appetite is heightened. That’s the time diversification comes in. The main purpose of exposure to different asset classes is to balance risk and return in a portfolio.

In the cryptocurrency space, diversification could also be one of the ways to manage risk exposure. Although some would argue that there’s impossible to diversify a crypto portfolio because major altcoins are highly correlated with bitcoin. However, with a carefully selected basket of altcoins in conjunction with stablecoins, investors could able to navigate the market more effectively with manageable risk.

That’s always a debate between putting all the eggs in one basket and placing the eggs into different baskets. While in some cases concentrating on only one asset could maximize the profitability, but this also maximizes the risk exposure at the same time. On top of that, a heavy concentrated strategy gives investors no room for any analysis error and overexpose to unnecessary risks.
However, over-diversification could also hurt investment returns. Some investors believe that the more assets they own, the better return they can have, and that’s not the right concept. It could increase investment cost, adding unnecessary due diligence efforts, and leading to below-average risk-adjusted returns.

Before getting into portfolio diversification, let’s have a quick recap on the performance of major cryptocurrencies. The figure below shows that OKB and BTC were among some of the YTD gainers, while XMR and XRP have been underperforming their peers. Once again, this shows various crypto assets could perform very differently, highlighting the importance of balancing risk and return.

A portfolio with a balanced selection of coins and tokens could help HODLers to balance risk and returns. We’ve used BTC alongside with other leading altcoins and the Fundstrat Crypto 40 Index, a weighted index tracks the top 11 to 50 cryptocurrencies by market value and liquidity, to construct some sample portfolios and the results could make HODLers think again about putting all eggs in one basket.