There’s lots of talk online about the best way to build a balanced crypto portfolio, but the reality is that even if you diversify your holdings across dozens of different digital assets, you’re still exposed to unnecessary risk.
Truth is, crypto is an extremely volatile place where the value of most assets is still inextricably linked to the big daddy of digital currency, namely Bitcoin. At the end of the day, the entire market of hundreds of different altcoins, even more established ones like ETH, BNB, SOL, AVAX and XRP, tend to mirror the market movements of BTC. If the price of Bitcoin goes up, so does that of most alts, but if it goes down, it generally drags the rest of the crypto market with it.
So if you’re going to truly balance your crypto portfolio to hedge against the unpredictable volatility that characterizes this market, you’re going to need to look at some non-digital assets. Namely, traditional assets such as Forex, stocks and shares, commodities, bonds and so on.
Understand Allocation & Diversification
When building an investment portfolio, it’s necessary to understand the difference between allocation and diversification. Allocation refers to holding different classes of assets, such as crypto, forex, precious metals, stocks, cash and so on. On the other hand, Diversification refers to how your investment funds are distributed among those different asset classes. Crypto is technically a single asset class, and so it’s a good idea to diversify your crypto holdings among various tokens, such as Bitcoin, Ethereum, and some lesser-known altcoins as speculative bets.
You should diversify all of your asset classes, not just crypto. If you’re into stocks and shares, you may want to spread this among several different industries, such as technology, healthcare, energy and agriculture. So allocate your funds across different asset classes, and then diversity within each one to hedge against market risk and reduce your exposure to volatility.
Diversify Your Crypto Holdings
When it comes to your crypto portfolio, it’s a good idea to diversify among different tokens. Most investors will hold a significant amount of established tokens, such as Bitcoin and Ethereum, which can make solid gains during a bull market run.
They’ll also want some more speculative bets, namely smaller and lesser-known altcoins that are more likely to explode in value and see massive gains should the wider crypto market begin rising. This is where the real profits are to be made in crypto, these days.
Investors can help to balance their portfolio by including stablecoins too. Examples of these include USDC and USDT, which are pegged to the value of the U.S. dollar and represent a good hedge against volatility.
Investors may also want to consider the passive income earning opportunities with crypto. While it’s always possible to follow a simple buy and hold strategy, you can explore other options in the world of decentralized finance. Protocols such as Curve and Balancer allow DeFi investors to engage in yield farming, where they provide liquidity to different exchange platforms to enable trades. Users can earn a percentage of those trading fees.
Other options include staking crypto, which is only possible with certain digital assets, and involves locking funds into a smart contract to help the underlying blockchain verify transactions.
Allocate Funds Outside Of Crypto
Crypto can produce some meteoric gains and generate solid passive income, but it can also destroy your portfolio if you go all-in at the wrong time. As the old saying goes, don’t put all your eggs into one basket, but instead allocate your funds across multiple assets.
Some options include stocks and shares, real estate investment trusts, exchange-traded funds, mutual funds, commodities, precious metals and Forex, to name just a few of the more obvious ones.
With crypto becoming more mainstream these days, it’s possible to keep things simple and manage all of your investments in a single platform. For instance, MultiBank provides investing services that span both crypto and the traditional financial world. MultiBank.fx makes it possible to invest in a range of traditional financial instruments, including stocks, perpetuals and Forex. Through its new MultiBank.io platform, investors can now enter the crypto market too.
This may be a safer way for people to invest in crypto. While many crypto exchanges are seen as risky, MultiBank’s traditional investing platform is among the most regulated in the world, with licenses to operate across multiple territories spanning five continents. With most of its users focused on traditional finance, it’s unlikely to take any risks with user’s crypto funds.
Find Assets That Don’t Correlate
The idea of asset diversification stems from the Modern Portfolio Theory, which is focused on reducing the risk exposure and potential return of an investment portfolio by spreading it across different classes of assets.
U.S. economist Harry Markowitz, the author of Modern Portfolio Theory, explains in his research that the risk level of any portfolio is more than just the sum of its individual components, being dependent on correlation too. By that, he is referring to the way those assets or holdings interact with one another.
Markowitz recommends that investors put their funds in a range of assets that behave differently. This means finding different investments where their performance is not correlated with the others. In this way, investors can build a more efficient portfolio with superior risk-adjusted returns to those based on investments that correlate with one another.
