Navigating the challenges of the crypto industry proves to be as difficult for beginners as it is for professionals. Cryptocurrencies are unpredictable in their price movements, making volatility a feared aspect of the crypto market. However, traders dare to manage it by riding the waves of instability.
As amusing as this sounds, volatility is a genuine challenge, and navigating it requires a profound understanding of the market. Numerous factors influence it, including market sentiment and changing regulations, so keeping an eye on the news is essential for investors and traders.
At the same time, analyzing the most recent crypto predictions based on news and media coverage can help adjust your strategy to safeguard your assets. Still, the most straightforward method to navigate volatility is to diversify your portfolio of assets and allocate finances accordingly. Here’s how to do that.
Diversify based on market cap
Market capitalization gives insight into the total value of the tokens created within a crypto project. While the calculations measure how popular a cryptocurrency is, they also indicate its safety or lack thereof. There are three types of market cap coins you should introduce in your portfolio:
- Large-market-cap coins should be the majority, since they have proven more stability throughout the years. Typically, these are the top ten assets in the market and include Bitcoin and Ethereum;
- Mid-market-cap assets should also be included with moderation, as they bring benefits due to growing adoption and active communities;
- Small-market-cap tokens tend to be the riskiest, since they include emerging blockchain projects that are highly volatile;
The best-balanced approach is an 80% allocation to large-cap coins and 20% to mid and small-cap tokens. While the first stabilizes your portfolio, the latter can expose you to new technologies and investment opportunities.
Diversify with blockchain technology
All cryptocurrencies reside on different blockchains, whose underlying features can significantly impact the future of the asset. For example, Bitcoin’s ledger may not be suitable for those seeking frequent updates, which is why Ethereum is a better choice. The creator, Vitalik Buterin, is on a journey to take the network to the next level through its development roadmap, which includes updates to make it fully scalable and resilient.
Another promising blockchains include Solana, Polkadot, and Ripple. They established themselves as innovative, environmentally-focused, and community-centered. You could also pick blockchains based on the industries they’re most used in. For example, ChainLink is an efficient tool for supply chain automation, as it connects smart contracts with APIs. Tron, on the other hand, is a great network for DeFi (decentralized finance) due to its large user ecosystem and low transaction costs.
Diversify across asset classes
The best thing about cryptocurrencies is that they’re coming in a vast array of technologies. Bitcoin, for example, is a store of value assets as it maintains its purchasing power. On the other hand, Ethereum is an altcoin, Tether is a stablecoin, and Dogecoin is a meme coin.
As you can see, cryptocurrencies have different functions in the industry, and some tend to be more popular than others throughout the year. If you are aware of the changing market cycles, then you will know what to invest in based on the dominance of whether the Bitcoin or altcoin season is in effect. As a hint, the altcoin season starts when technology flourishes and more crypto projects enter the market, driving altcoin’s entire value to surpass Bitcoin’s. This also means better values for tech-driven coins and blockchains.
Learn how to minimize diversification challenges
The advantages of portfolio diversification are numerous: it reduces risk, lowers volatility, and improves the odds of selecting valuable investments. However, it’s easier said than done, so be wary of the following:
- Diversification is time-consuming, as it requires more knowledge than copy trading, for example, when you only follow others’ investments. You must get acquainted with the endless technical terms;
- Diversification can still lead to losses, as there’s no ideal formula in crypto that can protect you entirely. However, it minimizes the risk of losing more than you can afford to invest;
- Diversification only works if you find the balance based on your risk assessment. As a beginner, you may want to keep allocation at a minimum and vary it as you gain more experience;
As a brief example, here’s what different portfolio diversification would look like based on risks:
- A lower risk portfolio is about 50% BTC and 50% USDC;
- A medium risk portfolio includes 50% BTC, 25% ETH, and 25% USDC;
- A high-risk portfolio involves 50% of different low-market cap coins, 30% different altcoins, 15% BTC, 5% NFTS;
How can you better manage your portfolio?
While diversification is essential, learning how to manage the portfolio is also needed. For example, portfolio rebalancing is one of the most effective strategies for staying current with trends and ensuring your portfolio remains up-to-date with the latest industry changes. This also applies to institutions, not only individuals, as David Princay, President at Binance.com France, stated, “If or when BTC prices plateau, institutions and corporations may look to diversify their crypto holdings further. It will be interesting to observe how an altcoin season unfolds in a more mature and regulated crypto market.”
Dollar-cost averaging (DCA) is also popular among beginners and long-term investors. It implies making small purchases of assets over time, despite fluctuations in prices. This helps withstand volatility and build strength, as it smooths out price fluctuations.
Holding on for Dear Life (HODL) is, ultimately, an investment method some users swear by. Basically, you buy cryptocurrencies and keep them in your portfolio for a long time, so they increase in value. When they become scarcer, you can either withdraw or sell them.
Conclusion
Portfolio diversification is an ideal strategy for safely navigating volatility, as crypto prices are influenced by a vast array of external factors. New technologies, economic outlooks, and upcoming regulations can all impact crypto prices, which is why knowing how to allocate your finances across assets can ensure long-term stability and greater value. In addition, employing dollar-cost averaging or HODL-ing can determine the effectiveness of your diversification.