Cryptocurrency investments are the next big thing for many investors, as traditional financial institutions more widely accept them.  Investors should diversify their portfolios and mitigate the risks involved when choosing which cryptocurrency coins to use.

In this article, we’ll go over the process of asset diversification and how it applies to the cryptocurrency industry.  The basic principles are the same as with any other diversification process – the goal is not to put all your eggs in one basket and to have other currencies to fall back on if one of them isn’t profitable.

Four Ways to Diversify Crypto Investments

 There are four main ways to diversify crypto investments.  This doesn’t mean just buying four different currencies.  The goal is to diversify the investments so that you can remain profitable even if the market forces change and cause disruptions in different industries and fields of work.

Coin Types

The first type of diversification to take into account is to diversify by coin type.  Many different coin types are based on their use and purpose for the buyer.  A good investor will purchase different coins of different types.

Industry Focus

Cryptocurrencies are used in various industries, and investment should diversify across these industries.  Such a move is always challenging for an investor as it’s difficult to figure out what new industry will accept the use of crypto next.

 Asset Classes

Historically, asset classes are equities, fixed income, and real estate.  None of these apply to crypto traditionally, but cryptocurrencies are venturing into these markets.

Investment Vehicles

Many different investment vehicles can be used to get into the crypto markets.  These include digital wallets, taxable brokerage accounts, and individual retirement funds.

Different Types of Coins

 There are different types of crypto coins in circulation, with a variety of different goals.  A diverse portfolio taps into all the markets and spreads the investments between a few different coins and coin types.

•     Payment tokens –are the most well-known of all the crypto coins.  They are made to make purchases online.
•       Security tokens – These are backed by underlying security, in most cases, a traditional one like real estate.
•       Utility tokens – are the tokens with a specific use within the blockchain system.
•       Governance tokens – the tokens issued for this purpose allow the user to govern the crypto that issues it.
•       Gaming tokens are issued within a cryptocurrency-based game and can be used to make in-game purchases or exchange for one of the other types of coin mentioned above.

Diversifying by Industry

 Cryptocurrencies are used in many different industries, and more and more fields are opening up to the idea of using crypto for payments.  The benefits that come with using crypto- anonymity, speed of transfers, and low fees are useful to any industry.

Supply Chain Industry

 The supply chain industry was among the first to accept cryptocurrency payments and blockchains in its daily operations.  This is because blockchain allows for the creation of smart contracts.  The terms of the contract are written into the code itself, and the funds are released when the terms are met.

This greatly suits the supply chain industry with a lot of moving parts and independent contractors.  Automating the payment process for everyone involved has made the industry safer and better organized.  Investing in coins primarily used in this way is, therefore, one of the safest bets in crypto.

Online Gambling

Most of the new crypto casinos operate with crypto only, and they offer all of the games players can find in traditional gambling establishments.  Crypto payments have made the process easier, more secure, and faster than the alternatives.

There’s a growing gambling market out there, as there are countries that don’t allow gambling, and online and crypto casinos provide a way around those restrictions.  Investing in coins used for wagering online also provides the investor with a wide array of options to choose from.

Real Estate Industry

 The real estate industry was also eager to accept crypto payments.  The process of purchasing real estate is complex and involves many moving parts.  That’s why smart contracts help automate the process and release the funds after completing each step individually.

The industry primarily relies on well-tried coins, so the investors looking to get into this industry usually focus on Bitcoin and Ethereum coins.  That’s because they are the least volatile, which suits large real estate purchases.

Different Asset Classes

 Buying stocks as a way to invest in cryptocurrencies wasn’t an option until just a few months ago.  The investors could get into the market only by purchasing coins and diversifying by getting different types of coins used in different industries.

However, this has now changed as more cryptocurrencies are looking to introduce ETFs as a way for investors to buy into the company by purchasing stocks in the market and not buying coins directly.  The goal is to get investors from traditional financial institutions such as banks and even pension funds.

ETFs are not yet approved by the proper agencies that govern stock trading, but they will soon be in a few different countries, starting in the US.  It’s the next big thing for the industry and will allow for new ways of decentralizing.  These moves are backed by some of the largest investors in the world, such as BlackRock.

A few Downsides of Diversification

Diversifying a crypto portfolio is a smart way to go, and it’s the best policy investors can have to mitigate the risks involved.  However, it’s essential to keep in mind that there are also downsides to it.  Investors should try to create a balance between the lower risks and these downsides.

Lower Yields

 Diversifying a crypto portfolio means that the investors may expect a bit lower yields.  That’s the downside that the investors need to expect for the lower risks.  Fees and transaction costs are involved, and if more mediators are involved, it can eat into the profits.  When investing in only one coin, these expenses are lower, so the yields are somewhat higher.

More Tax Costs

 Each investment and the profit from it are taxed separately.  Therefore, diversifying the portfolio means more tax costs, which the investors need to prepare for if they want the benefits of mitigating risks.  It’s a matter of balance, as are most things in trading.  As tax is one of the biggest expenses for investors, it’s an important feature to keep in mind.

More Work

 Investing in different coins across a variety of industries and within different investment channels requires more work on the part of the investor.  If this work is outsourced to the experts, as is usually the case, it will also cost more and cut into the profits.

To Sum Up

Diversifying a crypto portfolio is a smart business strategy.  It means purchasing different coins so that not all your eggs are in one basket.  It’s not enough to buy different coins; instead, investors should spread their investments between coins of different types and those that are used in different industries.  That way, no single investment can destroy the whole prospect.

There are some downsides to this regarding costs and somewhat smaller yields, but those are worth it if they give the investors a chance to earn with fewer risks involved.