10 Tips for a Diversified Cryptocurrency Portfolio

Published on 7 August 2023 9 min read

Diversify across different cryptocurrencies
Consider cryptocurrency index funds
Invest in cryptocurrency companies
Include stablecoins in your portfolio
Allocate part of your portfolio to mining
Consider cryptocurrency ETFs
Keep an eye on emerging cryptocurrencies
Track your portfolio performance
Rebalance your portfolio regularly
Stay informed about market trends

Are you looking to dive into the vast ocean of cryptocurrencies, but unsure where to start? Building a diversified cryptocurrency portfolio is like assembling a jigsaw puzzle. You need to find the right pieces that fit together to create a complete picture. Let's take a tour of ten top tips that will guide you through this interesting journey. Our goal is to help you build a portfolio that not only has potential for growth but also can weather the storms of market volatility.

Diversify across different cryptocurrencies

The first step in building a diversified cryptocurrency portfolio is to spread your investments across different cryptocurrencies. This is a bit like not putting all your eggs in one basket. Here's why it's a good idea:

Reduction of Risk: Investing in a single cryptocurrency can be risky. If its value plunges, your entire portfolio goes down with it. Diversifying can help safeguard against this.
Access to More Opportunities: Different cryptocurrencies have different growth potentials. By spreading your investments, you open up to a wider range of profit opportunities.
Balance: Some cryptocurrencies are volatile, while others are more stable. A mix of both can give your portfolio a balanced outlook.

Now, you might be wondering how to pick the right cryptocurrencies. Well, start by looking at those with a strong track record and wide acceptance. Some of the big names include Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP). But don't stop there. Keep an eye on smaller, emerging cryptocurrencies as well. Their growth potential could surprise you.

Remember, the goal is not to pick the "winning" cryptocurrency. It's about creating a blend that can help you achieve steady growth over time. So, while you're on the path of building a diversified cryptocurrency portfolio, remember this mantra: diversify, diversify, diversify!

Consider cryptocurrency index funds

Have you ever considered cryptocurrency index funds? If not, you might want to. Index funds are a great way to achieve diversification in your cryptocurrency portfolio. But what are they, and how do they work?

Think of an index fund as a basket of different cryptocurrencies. Instead of buying individual cryptocurrencies, you buy a share of the basket. The cryptocurrencies in the basket are selected to represent a particular index. This could be a broad market index like the Bitwise 10, which tracks the 10 largest cryptocurrencies, or a more specific index.

Easy Diversification: When you buy an index fund, you automatically get a diversified portfolio. It's a shortcut to achieving diversification without having to pick and choose individual cryptocurrencies.
Lower Costs: Buying and selling individual cryptocurrencies can be costly due to transaction fees. With index funds, you make one transaction instead of multiple, often saving on costs.
Less Stress: Maintaining a diversified cryptocurrency portfolio can be stressful. You have to constantly track market trends and adjust your portfolio. With index funds, the fund manager does the heavy lifting for you.

While index funds can be a great tool in building a diversified cryptocurrency portfolio, they aren't without risks. The value of the index fund will go up and down based on the performance of the cryptocurrencies in it. So, while they can save you time and effort, make sure to do your research before investing.

Invest in cryptocurrency companies

When we talk about building a diversified cryptocurrency portfolio, it isn't just about buying different cryptocurrencies. Another smart move can be investing in companies that are part of the cryptocurrency ecosystem. Now, you might be wondering: "How does investing in companies equate to diversifying my cryptocurrency portfolio?" Let's break it down.

Companies like Coinbase, a popular cryptocurrency exchange, or MicroStrategy, a business analytics platform that's heavily invested in Bitcoin, are examples of companies that are deeply rooted in the cryptocurrency market. By investing in these companies, you indirectly gain exposure to cryptocurrencies.

The Ripple Effect: When cryptocurrencies do well, so do cryptocurrency companies—and vice versa. You get to ride the wave without directly dealing with the volatility of individual cryptocurrencies.
Extra Diversification: By investing in cryptocurrency companies, you're spreading your investment across different asset classes. This can help to further diversify your portfolio and potentially reduce risk.
Steady Income: Some cryptocurrency companies pay dividends to their investors. This can provide a steady income stream in addition to potential capital gains.

Investing in cryptocurrency companies can add another layer to your diversified cryptocurrency portfolio. But remember, investing in any company comes with risks. Make sure to research and understand the company's business model, financials, and the risks involved before investing.

Include stablecoins in your portfolio

Let's face it: the world of cryptocurrencies can sometimes feel like a rollercoaster ride. The prices go up and down, often in a flash. If you're someone who prefers a smoother ride while building a diversified cryptocurrency portfolio, stablecoins could be the answer.

Stablecoins are a type of cryptocurrency that are designed to maintain a stable value. They do this by tying their value to a reserve of assets. This could be a specific currency like the US dollar, or a different asset like gold. By doing so, stablecoins offer the benefits of cryptocurrencies—like quick transactions and security—without the wild price swings.

Here are a few points to consider when adding stablecoins to your portfolio:

Reduced Volatility: Stablecoins can help you add balance to your portfolio. While other cryptocurrencies can fluctuate wildly, stablecoins aim to keep their value stable.
Safe Haven: In times of market downturns, stablecoins can act as a safe haven, protecting your portfolio from extreme market volatility.
Liquidity: Stablecoins are often used to trade against other cryptocurrencies. They can come in handy when you want to quickly move in and out of positions without converting back to traditional currency.

Popular stablecoins include Tether (USDT), USD Coin (USDC), and DAI. Including stablecoins in your diversified cryptocurrency portfolio can be a good way to hedge against volatility and maintain a healthy balance.

Allocate part of your portfolio to mining

The word "mining" might make you think of pickaxes and hard hats, but when it comes to cryptocurrencies, it's a whole different ball game. Cryptocurrency mining is a method of earning cryptocurrencies by solving complex mathematical problems with computer hardware. It's like solving a digital puzzle, and the prize is cryptocurrency!

So, how can mining fit into building a diversified cryptocurrency portfolio? Let's dig in.

Steady Income: Mining can provide a steady stream of income, depending on the cryptocurrency being mined and the power of your hardware. While other cryptocurrencies might be more volatile, mining can potentially offer more stability.
Supporting the Network: Mining not only rewards you with cryptocurrency, it also contributes to the security and integrity of the blockchain network. As a miner, you're helping to verify transactions and prevent fraud.
Diversification: Mining can be an interesting way to diversify your portfolio. Instead of just buying cryptocurrencies, you're actively participating in the creation of new coins.

Mining can be a bit technical, and it does require an investment in hardware. But if you're up for the challenge, it could be a rewarding addition to your diversified cryptocurrency portfolio. Remember, you don't necessarily have to mine Bitcoin or Ethereum; there are many other cryptocurrencies out there that might be easier and more profitable to mine. So, if you're looking to add some variety to your portfolio, why not give mining a shot?

Consider cryptocurrency ETFs

ETFs, or exchange-traded funds, are a type of investment fund and exchange-traded product. They're traded on stock exchanges, just like individual stocks. But instead of owning a piece of one company, when you buy an ETF, you're buying a basket of different assets. This can be a great way to diversify your investments, and it's no different when it comes to cryptocurrencies.

Instant Diversification: By investing in a cryptocurrency ETF, you're getting exposure to a variety of cryptocurrencies without having to buy each one individually. It's like getting a sampler platter at a restaurant — you get to taste a little bit of everything.
Easy to Buy and Sell: Cryptocurrency ETFs are traded on traditional stock exchanges. This means they're easy to buy and sell during market hours, just like any other stock. You don't need to navigate the sometimes confusing world of cryptocurrency exchanges.
Professional Management: ETFs are managed by professional fund managers. They handle all the research, selection, and balancing of the cryptocurrencies within the fund. You get the benefits of their expertise without having to become a cryptocurrency expert yourself.

Cryptocurrency ETFs can be a handy tool in your diversified cryptocurrency portfolio toolbox. They're not for everyone, but they can provide a simple and efficient way to gain exposure to a variety of cryptocurrencies. If you've been feeling overwhelmed by the idea of researching and buying multiple cryptocurrencies, a cryptocurrency ETF might be the right choice for you.

Keep an eye on emerging cryptocurrencies

Building a diversified cryptocurrency portfolio is like being a scout in the wild. You're always on the lookout for new opportunities. Emerging cryptocurrencies can be one of those opportunities. But how do you spot them? Here are a few tips.

Get Curious: Emerging cryptocurrencies often bring innovative solutions to the table. They might have a new take on blockchain technology or propose a unique use case. So, let your curiosity guide you. Dig into what makes these new players different.
Research the Team: Behind every cryptocurrency, there's a team. Look at their past experiences and their vision for the project. A strong, committed team can be a good sign.
Community Matters: A vibrant, active community can be a strong indicator of an emerging cryptocurrency's potential. Regular updates, active forums, and a growing user base can all be positive signs.

Remember, investing in emerging cryptocurrencies can come with higher risks. They're new, untested, and can be more volatile. But with higher risk can come higher reward. If you're willing to do the research, emerging cryptocurrencies can add a dash of spice to your diversified cryptocurrency portfolio.

Track your portfolio performance

Think of building a diversified cryptocurrency portfolio like setting up your fantasy football team. You don't just choose your players and forget about them, do you? Nope, you keep tabs on their performance, make trades, and adjust as necessary. Your cryptocurrency portfolio is no different.

Use a Portfolio Tracker: With so many cryptocurrencies in your portfolio, keeping track of them all can be a chore. That's where portfolio trackers come in. They can help you monitor the value of your investments in real-time, right from your smartphone.
Check Regularly: Cryptocurrency markets move fast. Really fast. Prices can skyrocket or plummet within hours. Regular check-ins can help you stay on top of these fast-paced changes.
Analyze Performance: Over time, some cryptocurrencies in your portfolio will perform better than others. Regular performance reviews can help you identify these trends. You can then adjust your portfolio to maximize gains and minimize losses.

Remember, tracking your portfolio isn't about making impulsive decisions based on daily price fluctuations. It's about understanding trends, making informed decisions, and continuously optimizing your portfolio for success. Because in the end, building a diversified cryptocurrency portfolio is not just about choosing the right cryptocurrencies. It's also about managing them effectively.

Rebalance your portfolio regularly

Just like you need to occasionally trim your hair to keep it healthy, your cryptocurrency portfolio needs regular trims too. And by trim, I mean rebalance.

Understand Rebalancing: Rebalancing is when you adjust the weights of different cryptocurrencies in your portfolio. Let's say you started with equal investments in Bitcoin and Ethereum. But now, Bitcoin's price has soared, and it makes up 70% of your portfolio. To rebalance, you'd sell some Bitcoin and buy Ethereum to bring them back to equal weights.
Set a Rebalancing Schedule: There's no one-size-fits-all schedule for rebalancing. Some people prefer to rebalance monthly, others quarterly, and some only when the weights are significantly out of balance. The important thing is to have a schedule and stick to it.
Use a Rebalancing Tool: Luckily, you don't have to do all this manually. There are several tools available that can automatically rebalance your portfolio according to your chosen schedule and guidelines.

Rebalancing helps keep your portfolio's risk level in check. It brings back the balance, ensuring no single cryptocurrency can make or break your portfolio. After all, the key to building a diversified cryptocurrency portfolio is spreading the risk, not piling it up on one coin.

Stay informed about market trends

Just like you wouldn't drive without checking your rear-view mirror, you shouldn't invest without keeping an eye on market trends. Staying informed about market trends is like having a compass in the wild world of cryptocurrency. It helps you make informed decisions, spot opportunities, and avoid pitfalls.

Read the News: Cryptocurrency news sites are a great source of information. They cover everything from new coin launches to regulatory changes. You don't have to read every single article—just a quick daily check should suffice.
Use Analytics Platforms: These platforms are like your personal crypto crystal ball. They provide data on trading volumes, price movements, market caps, and more. They're a great tool for spotting trends and making predictions.
Join Online Communities: Communities like forums and social media groups are treasure troves of insights. Here, you can learn from experienced investors, ask questions, and even get tips on potential investments.

Remember, the cryptocurrency market is highly volatile. What's hot today might not be tomorrow. That's why staying informed is so important— it helps you respond swiftly to changes, ensuring your portfolio remains balanced and diversified.

If you enjoyed this blog post on creating a diversified cryptocurrency portfolio and want to learn more about the digital economy, check out Tom Glendinning's workshop, 'Crypto For Creators, Part 1: The Backbone Of The Digital Economy.' This workshop will provide you with valuable insights into the world of cryptocurrency, its impact on the creative industry, and how you can leverage it for your own creative endeavours.