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What Are the Benefits of Diversification in Crypto?

What Are the Benefits of Diversification in Crypto?

This research was sponsored by Amun.com  

Cryptocurrency is a popular investment vehicle because of its volatility and potential for gains. As seasoned investors have learned, some the hard way, higher potential returns and higher potential risk tend to go together.

One popular investing strategy to mitigate risk in traditional markets is diversification.

In this article, we explore what diversification is and how it can be applied in crypto.

What Is Diversification?

Let’s explore this from the perspective of traditional markets like stocks.

By its very nature, investing involves exposing oneself to financial risk with a potential reward of expected financial gains. The purpose of diversification is to lower the risk in investing.

Diversification is a method of investing where one invests in multiple different investments, instead of just one or a few investments.

Diversification often means spreading investments across different sectors, different financial instruments and different industries. In traditional investing this could mean investing in multiple stocks as well as bonds.

One could say that diversification mitigates the damage from non-systemic risk, such as a single company failing.

Taking a hypothetical example, let’s say one invested in ten companies equally. If nine stocks maintained the same share price, while one stock dropped 30%, the investor’s portfolio would only drop 3%. If one stock dropped 10%, while the other nine stocks gained 2%, the investor’s portfolio would gain 1%.

Diversification can’t reduce systemic risks, meaning if the entire market crashed 30%, then one would likely see huge losses from all stocks.

The benefits of diversification in a portfolio include:

  • Reduced volatility
  • Less stress
  • Minimizes overall risk of loss
  • Exposure to more opportunities for return

It should be noted that no matter how much one diversifies a portfolio, risk is never eliminated completely.

One popular financial instrument that exists in traditional financial markets that often assists diversification is an Exchange Traded Fund, or ETF.

An ETF contains a basket of investments that can include stocks and bonds. An ETF can track an underlying index such as the S&P 500 and it can follow an industry, sector, commodity or a currency. An exchange-traded fund’s price rises and falls throughout the day just like the price of a stock does.

By investing in an industry ETF, one can also save a lot of time. An investor can have exposure to dozens of companies in that field without spending hours of time studying every single company and decides which ones to invest in.

How Can You Diversify in Crypto?

market prices

We are so early in crypto that diversifying, or even investing in crypto can be considered partially an art and partially a science. That being said, here are some facts one should consider.

  1. Cryptocurrencies with a smaller market capitalization tend to be more volatile than cryptocurrencies with a larger market capitalization.
  2. Bitcoin: most of the cryptocurrency market follows BTC, which has the largest market capitalization and is relatively less volatile than other cryptocurrencies.
  3. Ethereum: After bitcoin, the next largest cryptocurrency by market capitalization is ETH.
  4. Cryptocurrencies span various sectors and are built on different blockchains. One can gain exposure to specific fields or tokens on blockchain networks that they want to invest in.

Investing based on point #4, at first glance, appears to be a great way to invest considering the risk involved with crypto. However, it’s basically a full-time job, and few have the time or the inclination to do so.

Are there any products like ETFs in crypto?

Yes, there is at least one that I am familiar with. One product that I feel is worth considering is Amun DeFi. As of this writing, they have three separate products. There are actual cryptocurrencies tokens on a blockchain, and they work like an ETF where they gain exposure to a specific area within crypto.

These are:

  • DFI, which gives exposure to DeFi.
  • PECO, which gives exposure to the Polygon ecosystem.
  • SOLI, which gives exposure to the Solana ecosystem.

About Amun DeFi

Amun DeFi

Amun takes the guesswork out of investing by automating your portfolio. Amun does this through carefully crafted, efficient and low-fee index tokens.

Amun is a leading cryptocurrency issuer which aims to make purchasing crypto more accessible, and efficient.

Through their sister company, 21Shares, Amun is the world’s largest issuer of crypto exchange-traded products (ETPs). Their suite of ETPs has simplified access to crypto for both institutional and retail investors in the traditional finance community.

In a similar fashion, Amun aims to provide tokens that will make it easy for the crypto community to access sophisticated strategies that are not otherwise readily available in this space. Amun is composed of a team of entrepreneurs, engineers, and financial product developers who are uniquely placed to revolutionize cryptocurrency investing through the issuance of our broad range of tokens. Their goal is to make these tokens present a new paradigm in cryptocurrency investing and to facilitate their use.

To find out more visit amun.com.

If you enjoy reading stories like these and want to support me as a writer, consider Subscribing.

 


This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.

Author

Alexandre Lores is a personal finance writer from Tampa Bay, Florida, with the goal to help one million people achieve financial freedom. He has spent over five years studying markets and economics, finding Bitcoin in 2017 and never turning back. He frequently appears on TV and in online news articles and is a regular Twitter spaces host.

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