Strategies to diversify your cryptocurrency portfolio

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Investing in crypto can mean more than coins or tokens.

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Are you a bullish crypto investor whose entire portfolio consists of just one or a few coins? If so, you might seriously consider adding a little diversification into your crypto mix.

If you’re not entirely familiar with the concept of diversification, it’s the old wisdom of “not putting all your eggs in one basket.” Diversification means spreading your risk around, so that if some crypto assets fall in value, others may either decline to a lesser degree, maintain their value, or possibly even rise in value.

The point is to avoid putting all of your money (and risk) into just a few coins or tokens. This can help reduce volatility in your portfolio and, hopefully, avoid a major crash.

Now, let’s take a step back. If you’re mainly a stock investor who’s interested in crypto exposure to diversify your stash of securities, then you can jump to our article on investing in cryptocurrency stocks. It talks about crypto but from a regulated (and less headachy) securities perspective.

But if you’re an advanced (or more dedicated) crypto investor who’s willing to dive into the rabbit hole of crypto complexity, then keep reading. We’ll cover four different ways to diversify your crypto investments.

A straightforward way to diversify your crypto portfolio is to add new tokens to your existing holdings. Deciding which new cryptocurrencies to add may present a challenge, but you can make that process easier by evaluating your current investments.

Where is your token portfolio currently lacking? Here are some ways to diversify if you have a burning desire to buy more cryptocurrency:

Caveat: As with all major market crashes or bear markets, when the tide turns against the entire market, just about every asset class is vulnerable to a plunge. But if your portfolio is well diversified, it may fall to a lesser degree or recover faster than portfolios that are concentrated on assets that really fell out of favor in the markets.

Investors can use blockchain technology to invest in tokenized assets, which represent partial or full ownership of a digital or physical asset. Those who invest in tokenized assets may receive non-fungible tokens (NFTs) representing their ownership stakes.

Many different types of assets—both tangible and intangible—can be tokenized, including:

Caveat: Asset tokenization is still an emerging practice, so the market for some of these assets may be much less liquid (and more volatile) than others. Move cautiously if you plan on heading down this path.

A risky option for crypto portfolio diversification is investing in an initial coin offering (ICO). A coin undergoing an ICO is—by definition—a new cryptocurrency that is not yet circulating on the open market.

Investing in an ICO is one way to add more “small-cap” assets to your crypto portfolio. Purchasing a coin in its nascency when the price is low can generate significant upside, but the coin’s value could also drop to zero. Be aware of the risks before diversifying your crypto portfolio with this strategy.

Just as the traditional financial markets support advanced types of securities—and the key theme here is “advanced”—the cryptocurrency sector has developed a range of derivative financial instruments. If you’re looking to diversify your digital asset portfolio, you might consider a few of these instruments.

But be forewarned. Depending on what you trade and how you trade it, you could expose yourself to significant risk, so consider the following only if you’re an advanced trader. Crypto derivatives include:

Crypto investors can also access decentralized finance (DeFi) derivatives via several platforms. A derivative on a DeFi platform is based on an underlying DeFi asset and may be structured as an option, futures contract, or another advanced instrument.

Feeling bruised by the current price of Bitcoin? Another strategy to diversify your digital asset portfolio, and potentially lower its risk profile, is to focus on publicly traded cryptocurrency companies.

A broad range of businesses are partially or wholly dedicated to serving the cryptocurrency sector:

You might also consider buying shares in a cryptocurrency fund. Exchange-traded funds (ETFs) with crypto or blockchain exposure are perhaps the most accessible investments for most investors. If you happen to be an accredited investor, you might consider hedge funds or crypto investment trusts.

Some of these crypto funds hold cryptocurrency directly, while others invest in assets that derive their value from a cryptocurrency’s price movements. Additionally, some funds invest in companies operating within the crypto industry.

Investing in cryptocurrency is risky—full stop. Cryptocurrency prices, as with the industry itself, are volatile. Plus, crypto scams abound (so, certainly watch out for those). As a crypto investor, you may not be able to entirely mitigate the risk. But you can creatively construct a well-diversified cryptocurrency portfolio capable of taking a few hard hits in the market.

This article is intended for educational purposes only and not as an endorsement of a particular financial strategy. Encyclopædia Britannica, Inc., does not provide legal, tax, or investment advice. Please consult your legal or tax advisor before proceeding.