It’s easy to see the argument for diversifying your portfolio. Putting your eggs in one basket is just too risky. Spread the risk around, put them on different assets. That way, when one fails, you’ll still have a chance; losses can be minimized.
But, if you want to dip your toes into cryptocurrency yet feel that you don’t know enough about this new-fangled digital money, diversification is the way to go. As billionaire Warren Buffet says, “It’s a protection against ignorance.”
To be fair, cryptocurrencies can be unpredictable. Wild fluctuations and cryptocurrencies are becoming so intertwined that it’s becoming a cliche.
Remember that time in 2018 when the market for cryptocurrencies went down by $100 billion in just 24 hours? That must have caused a spike in the sales of antacids among crypto investors. But, then again, cryptocurrencies, specifically bitcoin, increased in value by around 200,000% between 2012 and 2021. This year, digital money is gaining more mainstream acceptance, which could drive prices even higher; diversification will probably become the accepted stance.
To cover all the bases, let’s look at the pros and cons of diversifying your portfolio with cryptos.
The Pros And Cons
Educating yourself on the pros and cons could give you an advantage. You’d be aware of the risks involved, problems that could arise, and other things. You can decide from a position of knowledge whether cryptocurrencies have a place in your portfolio. If you decide to include cryptocurrencies, here’s a list of the best crypto exchanges.
Let’s start with a few of the pros:
Reduced overall risk potential. Cryptocurrencies in the past such as bitcoin, litecoin, ethereum, and others tend to increase in value as stock prices drop. If this pattern holds, cryptos could be your hedge against a bear market. Moreover, as there are more than 5000 cryptocurrencies out there, you can spread the risk if you’re uncomfortable with investing in a single crypto. You can take small positions in different kinds of digital currencies.
Significant potential for appreciation. Diversifying your investment with cryptocurrencies can be a good move because of their continued appreciation. Bitcoin and other cryptos have grown exponentially in the past few years. Now that many companies and banks have embraced digital money, experts believe that the value could still increase. Of course, there are no guarantees that this would happen, but with bitcoin and the others, the excitement that something will ignite another increase can be very exciting. Just remember, losing your entire retirement savings in cryptos is still possible, but unlikely if you diversify.
Durability. Albeit some see digital currencies as worthless, these have managed to weather stomach-churning price swings and volatilities. This suggests that cryptocurrencies are here to stay, no matter what happens to today’s current batch. For more than a decade, cryptos had managed to stay in the game, holding their own against the more established assets like gold and silver, as well as currencies like the mighty US dollar and the 1200-year-old British pound sterling. Moreover, cryptos are beginning to be accepted as a mode of payment for many companies.
Now, for the cons:
Diversification could reduce returns. With your asset spread around, theres a chance that your returns might be reduced. Your high-performing investment could be weighed down by other assets that are performing poorly. This could put a limit on the earning power of your portfolio.
Too complex to manage. Diversified holdings might introduce a degree of complexity to your portfolios management. A single asset to manage is simple and easy to manage. But, if you’re monitoring the performance of a dozen or more, things could get confusing. This could even be more confusing if your assets aren’t available on a single trading platform, and you have to check multiple exchanges to track your investments.
Security. At the end of the day, digital money is still digital and can be subject to security breaches. While it’s true that blockchain technology is safe, theres still the risk of hackers, as what happened in the past, when several Initial Coin Offerings (ICOs) were hacked. Investors lost as much as $473 million as a result.
Diversifying your portfolio is a sound investment strategy that could protect you from market volatility. However, there are also disadvantages in diversification. Knowing the pros and cons is a great way to satisfy any doubts you might have about diversifying your portfolio with cryptos.
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