In April this year, novice investors experienced the first crypto scare of their lives as prices of the biggest altcoins fell from the sky. Ether, the flagship token of the Ethereum platform, was down more than 56 per cent from its all-time high of nearly US$4,400 just earlier in the month.
This recent scare has spooked seasoned and amateur investors alike and sparked furious speculation on whether the price decline sign that digital currency has entered the bear market prematurely.
While many market gurus agree that the incident is a “healthy correction” and have expressed unwavering confidence in the continuous upward trend of the crypto market, amateur investors like myself are still understandably nervous.
What can we do better to cushion ourselves from violent swings like this in future?
Diversification is key when it comes to altcoins
You’ve probably heard of the saying, “Never put all of your eggs in one basket”. This simple nugget of wisdom was born from acknowledging the concept of risk in everyday life.
Just like how humans can never predict events in this world with a hundred per cent certainty, all investments, no matter how “stable” or “legitimate” they are, cannot be divorced from risk. Diversification is a simple strategy that seeks to mitigate risk by balancing your investment portfolio across different assets.
Also Read: Bitcoin vs Altcoins: Which is the better investment?
The fundamental logic of diversification applies to every level of your investment portfolio. First and foremost, it is only wise to spread your investments across different asset categories, such as stocks, bonds, cryptocurrency, and cash. The specific asset mix that works for you is highly personal, depending on your risk appetite and time horizon.
To determine your mix, it is best to consult investing materials online and maintain an organised Excel sheet to get a good view of your current investments.
Are you diversifying?
Once you have balanced your investment portfolio across asset categories, the same must be done within each category. This is especially critical for cryptocurrencies because of their greater market volatility.
A quick search on YouTube will return tons of “how-to” videos teaching novice investors how to balance their crypto portfolios across bigger coins like ETH and altcoins, which require careful management.
These gurus claim that by investing in 10 different coins, you diversify your investments and reduce the risk of completely wiping out your portfolio from an unexpected market dip.
The recent incident should have poked holes into this investing tip. Across the board, prices for most coins fell drastically. My portfolio, which I believed was “diversified” across six different coins, lost more than thirty per cent of its value overnight.
While the coins varied in their percentage dips, spreading my investments across different coins did little to cushion the impact.
With an almost dizzying array of cryptocurrencies running on different blockchain networks and boasting various capabilities, it’s normal to think that these currencies are starkly other than one another. However, even though these coins grow at different rates, analysts have found that prices of the top 30 cryptocurrencies are strongly correlated with one another.
Also Read: Mobee launches crypto exchange in Indonesia, secures funding
There is also evidence that some lower-ranked altcoins are affected by the prices of larger coins. This means that when the price of one coin increases (especially the big ones), it is highly likely that the price of other coins will increase as well.
Sadly, the opposite is true, so you are not diversifying if most of your portfolio is only spread across the top coins.
If even buying altcoins does not work, does this mean we must make a foray into the world of “shitcoins” to diversify our portfolio truly?
DeFi investment projects
Fortunately, there is a smarter way to go about this. Rather than taking considerable risks to buy “shitcoins” that may or may not be fake, the recent explosion of decentralised finance (DeFi) projects present many exciting opportunities to diversify and grow your crypto portfolio.
Some of these projects are excellent candidates for diversification because they are stable and generally unaffected by the crypto market. Let’s take a closer look at one such durable DeFi investment product — real-world asset-based loans.
A real asset-based loan is a loan offered to the borrower based on their tangible assets’ values. Assets that businesses can use as loan collateral include equipment, inventories, and account receivables.
In case of a loan default, loaners will liquidate these assets to recover the loans they provided.
Because asset-based lending is based on the value of collateralised assets, asset values are usually stable and do not respond to market swings, even throughout fluctuating economic cycles.
Since interest rates are generated from real-world businesses and assets, investors in such DeFi projects can receive fixed-rate interest from their investments independent of market changes in the crypto world.
Traditionally, real-asset based lending is mostly available exclusively for hedge funds or private equity firms. However, DeFi technology has now made real asset-based loans available as an attractive option to investors who wish to reduce the risk of overexposing their portfolios due to market volatility in the crypto space.
#Tokenizetheworld
When it comes to investing, maintaining a diversified portfolio is half the battle won. Unfortunately, many of us fall into the trap of believing that our portfolios are diversified simply because of our different bear names’ cryptocurrencies.
It is essential that we do our homework and read more widely to rebalance our investment portfolio from time to time.
If you’re not careful, a single tweet from Elon Musk could wipe out your hard-earned investments just like that.
–
Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic.
Join our e27 Telegram group, FB community, or like the e27 Facebook page
Image credit: CNET
This article was first published on December 1, 2021.
The post You’re not really diversifying your investments by buying altcoins appeared first on e27.