How to Diversify Crypto for Beginners – Spot72.com
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How to Diversify Crypto for Beginners – Preparing risk anticipation is very important, especially for investing in assets with high levels of fluctuation and risk such as crypto. One of the steps that can be carried out is implementing crypto diversification appropriately.
Diversification is a trick that is accomplished by spreading an investment portfolio across a number of different assets. The goal is to mitigate the risk of a potential decline in an asset by investing in other assets.
This is because not all assets in the financial market always move in the same direction. There are those that go up when other assets are down, and vice versa. Now, by using such correlations, users of diversification tricks can minimize the risk of losses from declining assets.
In cryptocurrencies, diversification means dividing the investment risk available in crypto assets according to the sentiments and workflow of each crypto asset available on the market.
The Importance of Crypto Diversification
The first reason why you need to diversify cryptocurrencies is to maintain a portfolio value in a volatile market. There are two reasons why crypto diversification should be done:
- The disadvantages of investing in one coin can be offset by the gains in another.
- Minimizing the potential frees up profits in other coins. For example, a trader only invests in BTC and does not diversify. Whereas, on the other hand, the value of ETH is heading for a peak. In that state, surely he can lose out on potential profits in ETH. Conditions may be different if these traders diversify. Apart from investing in BTC, these traders are also able to profit from other coins that are currently experiencing profits, in this case ETH.
However, it is not easy to find any crypto coins that can be included in diversification tricks. Beginner traders usually have problems finding which coins are negatively correlated and assessing their potential with objective analysis. For this reason, there are 3 groupings of crypto coins that can be used as a reference for diversification. Here is a description.
How To Diversify Crypto By Type
The easiest way to diversify crypto for beginners is to choose a coin style. This diversification strategy is the most commonly implemented in the market. to ensure relatively intact profit margins as the portfolio consists of several types of cryptocurrencies that perform well despite falling prices.
When diversifying by type, traders need to find out more about a number of factors such as asset prices, past trends, and potential future trends. Not only that, the projects of each crypto usually have different foundations and supporting technologies.
How To Diversify Crypto By Industry
The second way to diversify crypto is by industry. That is, traders diversify assets based on usage. For example, Bitcoin was designed to make financial processes decentralized, safer and faster.
This will certainly make Bitcoin holders feel comfortable and free in conducting financial transactions. Meanwhile, unlike Bitcoin, Ethereum has a network for developing decentralized applications and smart contracts.
With its smart contracts feature, Ethereum can be used for a number of innovative applications in finance, web browsing, gaming, and advertising.
How to Diversify Based on Geography
The third way of diversification is by geography. Since each country brings its own provisions, it would be better if the investment capital is not allocated to crypto projects from the same country.
For example, the portfolio composition could consist of crypto projects originating from Europe (eg Aave and Polkadot), America (such as Solana), and Asia, (eg Polygon).
However, before deciding on a project based on a specific country, traders need to be clear about the country’s project performance to choose from. The following steps also provide other steps to balance a diverse portfolio, especially when market conditions are volatile.
Choose A Good Coin For Crypto Diversification
In diversifying crypto, there are at least four types of coins that can be used, namely:
This crypto asset carries a large market capitalization value, so it can provide significant profits during a bull market. With a coin supply of only 21 million pieces, Bitcoin is well suited as a means of storing wealth in the crypto space.
ETH is a coin used in DeFi traffic. In the future, the demand for this coin is predicted to be high because of its high use value.
Stablecoins are crypto assets whose value is linked to fiat money. As the name implies, this coin does not have volatile conditions like crypto assets. Stablecoins are suitable for use as a diversification asset when the crypto market is changing.
Coins That Provide Passive Income
For example, traders are looking for a coin that can experience a hard fork in order to be able to carry two different tokens even though initially putting funds in only one type of token.
In diversifying, traders need to ensure that the assets invested serve to solve problems in various industries. So, if there is a policy in a specific industry that is not profitable enough, that risk can be mitigated properly. Apart from that, traders can also apply safe crypto investment techniques with the Dollar Cost Averaging trick.
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