2. A constant theme that you hear in the traditional
investing world is to diversify your investments.
There are pros and cons to this approach for those
who invest in stocks and bonds. The usual rational
for diversification is that by doing so you are
spreading your risk across several investments.
3. For some investors, the best way to diversify is to use
an exchange traded fund that does the
diversification for you. Should you diversify your
crypto investments and, if so, how would you go
about doing that?
5. In the world of traditional finance, diversification
means investing in a mixture of stocks and bonds.
Stocks provide the chance of better profits while
bonds provide relative safety. Bonds can be seen as
cash equivalents or the same as just holding onto
cash.
6. In the world of crypto you have traditional crypto
tokens like Bitcoin and you have stablecoins.
Stablecoins are the cash equivalent part while
Bitcoin is like buying a stock like Apple or
Amazon.com.
8. In the world of stocks, there are new companies that
have the potential for significant growth and there
are companies like Coca Cola that are stable and
pay a decent dividend decade after decade. In the
world of cryptocurrencies there are established
tokens like Bitcoin, Ether, and Cardano. They go up
and down but are unlikely to fall off the earth or
multiply greatly in value.
9. And there are new tokens with the potential for
significant growth before they settle in. Techopedia
lists seven high-risk cryptocurrencies with growth
potential. These include Bitcoin Minetrix (BTCMTX),
Launchpad XYZ (LPX), yPredict (YPRED), eTukTuk
(TUK), Chimpzee (CHMPZ), Scorp Token (SCORP),
and Wall Street Memes (WSM). Each of these is
essentially a “story” investment.
10. The vast majority of new cryptocurrencies fold and
investors lose all of their money. When someone
invests in the right one by good insight or by
chance, they can earn multiples of their initial
investment. Many investors allocate a small portion
of their portfolio to these kinds of investments
while keeping the rest in investments that are more
secure.
13. Warren Buffett is an investor who would probably be
the wealthiest person in the world it he had not
been giving away about $10 billion a year with the
goal of giving it all away before he dies. Buffett
says that people hedge their bets by diversifying
because they do not know how to identify good
investments. Alternatively, they do not have the
time, patience, or expertise to make good
investment decisions.
14. Buffett says that these folks should invest in an
exchange traded fund that tracks the S&P 500.
Using this approach they are essentially investing in
the whole stock market as a proxy for the US
economy. Unfortunately, this approach is not
available for crypto. You need to pick individual
cryptocurrencies one at a time.
15. That being the case, a viable approach might be to
invest in equal amounts of Bitcoin, Ethereum, and
Cardano for one part of the portfolio. Then invest
in Tether, the cash equivalent, as another part. And
last, invest in a mix of startup tokens as the third
and smallest portion.
17. Folks in the stock market who hold stocks like
Microsoft, Apple, or Coca Cola usually buy and hold
these investments for years or decades. Folks who
buy a startup with growth potential are faced with
different decisions. When the new stock fizzles they
pick another new stock. When it soars and
multiplies in value they commonly sell, take their
profit, and look for another potential growth stock.
18. In the crypto world the same idea applies. If you buy
Bitcoin or Ether you are probably going to hold it. If
you buy one of the new ones on the list we
included, you will probably sell when it soars
upward, before it corrects back down.
19. This approach requires active portfolio management.
A basic decision when diversifying a portfolio is
whether or not you have the time, patience, and
expertise to do this well. If not, stick with your
Bitcoin, Ether, Cardono, and Tether, or whatever
you choose and get some sleep at night without
constantly worrying about the mix of your crypto
portfolio.
20. For more insights and useful information about
investments and investing, visit
www.ProfitableInvestingTips.com.