There’s a lot of talk on the internet about how best to build a balanced crypto portfolio, but the reality is that even if you diversify your holdings across dozens of different digital assets, you’re still exposed to unnecessary risks.
The truth is that crypto is an extremely volatile place where the value of most assets is still inextricably linked to the granddaddy of digital currency, namely Bitcoin. Ultimately, the entire market tends to reflect BTC market movements with hundreds of different altcoins, including more established ones like ETH, BNB, SOL, AVAX and XRP. When the price of Bitcoin rises, the price of most alternatives also rises, but when it falls, the rest of the crypto market generally takes it with it.
So if you really want to balance your crypto portfolio to hedge against the unpredictable volatility that characterizes this market, you need to look at some non-digital assets. Namely traditional assets such as foreign exchange, stocks, commodities, bonds and so on.
Understanding allocation and diversification
When building an investment portfolio, it is necessary to understand the difference between allocation and diversification. Allocation means holding different asset classes such as cryptocurrencies, forex, precious metals, stocks, cash, etc. On the other hand, diversification refers to how your mutual funds are distributed across the different asset classes. Cryptocurrencies are technically a single asset class, so it’s a good idea to spread your cryptocurrency holdings across different tokens like Bitcoin, Ethereum, and some lesser-known altcoins as speculative bets.
You should diversify all your asset classes, not just crypto. If you are interested in stocks, you may want to spread this across different industries such as technology, healthcare, energy and agriculture. So, divide your funds across different asset classes and then diversify within each to hedge against market risk and reduce your volatility risk.
Diversify your crypto holdings
When it comes to your crypto portfolio, it is a good idea to diversify across different tokens. Most investors will have a significant amount of established tokens like Bitcoin and Ethereum that can produce solid gains during a bull market run.
You’ll also want more speculative bets, namely smaller and lesser-known altcoins that are more likely to explode in value and see massive gains when the broader crypto market starts to rise. This is where the real profits can be made with cryptocurrencies these days.
Investors can help balance their portfolio by including stablecoins as well. Examples include USDC and USDT, which are pegged to the value of the US dollar and provide a good hedge against volatility.
Investors may also want to consider passive income generation opportunities with crypto. While it is always possible to follow a simple buy-and-hold strategy, you can also explore other options in the world of decentralized finance. Protocols like Curve and Balancer allow DeFi investors to participate in yield farming, where they provide liquidity to various exchange platforms to enable trading. Users can earn a percentage of these trading fees.
Other options include cryptocurrency staking, which is only possible with certain digital assets, and locking funds into a smart contract to help the underlying blockchain verify transactions.
Allocate funds outside of cryptocurrencies
Crypto can deliver meteoric gains and generate solid passive income, but it can also destroy your portfolio if you go all-in at the wrong time. As the old saying goes, don’t put all your eggs in one basket, spread your money across multiple assets.
Options include stocks, real estate investment trusts, exchange-traded funds, mutual funds, commodities, precious metals and forex, to name a few of the more obvious ones.
With crypto becoming more mainstream these days, it is possible to keep things simple and manage all your investments on a single platform. MultiBank, for example, offers investment services that span both crypto and traditional finance. MultiBank.fx allows investing in a range of traditional financial instruments including stocks, perpetual securities and Forex. Investors can now also enter the crypto market via the new platform MultiBank.io.
This could be a safer way for people to invest in cryptocurrencies. While many crypto exchanges are considered risky, MultiBank’s traditional investment platform is among the most regulated in the world and has licenses to operate in multiple territories on five continents. Since most users focus on traditional finance, they are unlikely to take risks with users’ crypto funds.
Find assets that are uncorrelated
The idea of asset diversification comes from modern portfolio theory, which aims to reduce the risk and potential return of an investment portfolio by spreading it across different asset classes.
US economist Harry Markowitz, the author of Modern Portfolio Theory, explains in his research that the risk level of a portfolio is more than just the sum of its individual components, but also depends on correlation. By this he means the way in which these assets or holdings interact with each other.
Markowitz recommends investors invest their funds in a range of assets that behave differently. This means finding different investments whose performance does not correlate with the others. This allows investors to build a more efficient portfolio with higher risk-adjusted returns than those based on correlated investments.
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