Everyone wants to have a winning cryptocurrency portfolio, but, unfortunately, many people who try to do this have no real strategy. Worst of all though, many of them have no clue how to diversify their portfolios. Diversification is extremely important, and, with something as highly volatile as cryptocurrencies, investors shouldn’t be without a good diversification plan.
How do you diversify your cryptocurrency portfolio?
In this article, we’re going to be talking about a few different methods that you can use to diversify your cryptocurrency portfolio and grow your HOLDings. Some of the topics we’ll be covering include:
1. Trading cryptocurrencies and finding arbitrage opportunities
2. Staking cryptocurrencies and using masternodes
3. Using crypto savings accounts to earn interest
4. Proper allocation of your assets to reduce risk
1.Trading on exchanges
What most people think of when talking about cryptocurrency investing is trading on exchanges. Many people simply don’t have the discipline or the stomach for trading. It’s very easy to let your emotions get in the way and you need an iron will to keep from making costly errors like panic selling or even panic buying into an unwise investment.
You also need to be aware of the perils lurking in trading markets, like the many unscrupulous pump-and-dump groups looking to take your money through misrepresentation and deceit. One way to protect yourself is to be very careful when taking investment advice from strangers. If an investment sounds too good to be true, it probably is.
Pros of exchange trading
If you develop good trading skills and apply smart money-growing strategies, you may find exchange trading can be lucrative. The constant ups and downs of the cryptocurrency market provide many opportunities to profit for those willing to learn how it works.
One way to take advantage of the ups and downs of cryptocurrency is to trade on more than one exchange. If you trade on multiple exchanges, you can also take advantage of arbitrage opportunities. This is when you purchase an asset on one exchange and then flip it on another exchange to make a profit on the price difference between the platforms. The profit margins are usually small, but you can make a lot of money if you do it frequently.
Cons of exchange trading
It’s easy to make costly mistakes when trading on exchanges. Even seemingly simple arbitrage trades could go take a turn for the worse if you’re not quick enough. You may also run into the problem of fees eating all of your trading profits.
2. Staking and masternodes
While coins like Bitcoin verify their transactions with the Proof of Work (POW) protocol, other cryptocurrencies use Proof of Stake (POS). POS doesn’t require specialized hardware as traditional crypto mining does and it uses a lot less electricity.
POW protocol used in Bitcoin
It’s also much easier to get started with POS, but you may need a significant number of coins to begin staking. That’s because, while the barrier to entry for POW is computer hardware, the barrier to entry for POS is your initial investment. Be aware that some masternodes could cost you thousands of dollars.
Staking is the easiest method to get started with. You’ll only need to acquire the minimum amount of coins and run a wallet capable of staking. After a designated amount of time, you’ll begin generating rewards that will be deposited into your wallet.
On the other hand, masternodes can often provide better rewards than staking, but they require more time and resources to get started. You’ll likely need to purchase a VPS to host the node, and setting them up is not always straightforward. You’ll also need a lot more coins to create a node than you would to stake, hence the reason rewards are typically bigger.
Pros of Staking and masternodes
It’s pretty easy to get started with staking, and it’s much easier to make sure you’ll generate a profit than with hardware-based mining. Staking works on virtually any computer, and some coins even allow you to stake on mobile devices. Masternodes, while a little more difficult to set up, still require far fewer resources than mining.
Cons of Staking and masternodes
In order to stake your wallet needs to run 24/7. If you don’t have a lot of coins or if the market is depressed then your rewards could be quite low, possibly so low that they might not even cover the cost of the electricity you use to generate them. Your wallet also needs to be unlocked for staking which could be less secure. Masternode owners could find that their earnings don’t even cover their monthly VPS bills.
3. Cryptocurrency banking and savings accounts
Believe it or not, there are cryptocurrency banks out there. These are relatively new establishments that will pay you a regular amount of interest for holding your cryptocurrency with them. You can think of them simply like a traditional bank for your fiat money.
The best part about adding crypto banking to your cryptocurrency strategy is that it’s totally hands off. The custodian does everything for you, and then they simply deposit your interest payments into your account.
If you have no desire to deal with the stress of day trading or swing trading cryptocurrencies but you’d still like to grow your holdings then this is a great option. You can deposit cryptocurrency to your WhaleLend account to get started, and you’ll earn interest every day. That’s it.
Related: A Primer on Crypto Margin Lending
Pros of crypto banking
Crypto banking is one of the few ways to earn passive crypto income. It works pretty much the same as HODLing, but you’ll get better returns from it. You can also earn even more for referring friends to the platform.
Cons of crypto banking
There is slightly more risk with this method than HODLing, but not much.
4. Proper Asset Allocation
Investing in a wide variety of cryptocurrency assets is very important for your diversification plans. The biggest issues are how to choose which cryptocurrencies to invest in and try to spread them out across different sectors or classifications.
Put a large portion of your portfolio into large-cap cryptocurrencies like Bitcoin and Ethereum which are more stable. These assets hold their value better when the market tanks. (They’re also typically the best candidates for crypto banking!)
Small-cap coins are less stable, but they’re great for growth. Your portfolio can make huge gains on a good pick, but you could also lose a lot on a bad pick. Diversify your portfolio by spreading your risk across multiple small-caps and limiting your exposure to them.
We already talked about staking and masternode coins, but there are other income-producing cryptocurrencies too. Some exchanges will even give you a percentage of their profits for holding their tokens! Income-producing assets help you to continue to make progress with your portfolio even if the market is currently depressed.
Different Industries and Sectors
Cryptocurrencies now have utility tokens which span many industries such as logistics, health, banking, and AI. Make sure all of your investments are not in the same industry, not to have all eggs in one basket and to help spread out your risk.
You can of course still stake or use cryptocurrency savings accounts to earn interest on many cryptocurrencies which fall within these asset classes as well. Make sure that you’ve done your research and that you’re giving yourself every advantage to succeed!
It’s important to remember that above all, you are the custodian of your own funds when it comes to crypto investing. That means that you’re responsible for their safety. You shouldn’t keep all of your funds in one wallet to prevent theft, and you should be careful which exchanges and services you trust with your money.
If you’re interested in trading, then designate a portion of your portfolio for this activity and keep the bulk of your investment somewhere safe. You could utilize a cold wallet, or you could also deposit those coins at WhaleLend to earn guaranteed daily interest on your holdings.
This allows traders to have a safe nest egg for when things go wrong, and it allows HODLers to earn income passively. Sign up for Whalelend today and get $10 for free to test out the platform.