How to Diversify Your Crypto Portfolio

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Contributor, Benzinga
May 16, 2022
verified by Ryan McNamara

Looking to diversify your crypto portfolio? FTX lets investors trade dozens of coins as well as NFTs!

One of the most common pieces of investment advice is to keep a diversified portfolio. Diversification helps protect investors from being overexposed to one sector of investments. Whether it be growth stocks, value stocks, bonds or commodities, for most investors it is best to hold a healthy variety. 

This strategy helps keep investors safe if certain asset classes perform poorly. For example, with a diversified portfolio, investors can sleep more easily without worrying if their 100% allocation in tech stocks will crash. Diversification is an important investment tool and is helpful in hedging your bets.

While diversification is clearly important in the traditional finance world, how does it relate to crypto investments? With most coins tailing the price movement of Bitcoin, is it even worth it to diversify? 

Disclosure: eToro supports the following currencies: BTC, ADA, DASH, DOGE, EOS, ETH, LTC, NEO, XLM, XTZ, TRX, ZEC. eToro USA LLC; Investments are subject to market risk, including the possible loss of principal. T&Cs apply. *The bonus is available to Benzinga readers in the US for open states only. Served by eToro USA LLC.

How to Diversify Your Investment Portfolio

Crypto tends not to attract the types of investors who are looking to play it safe. This asset class has shown great volatility. However, the cryptocurrency sector offers the opportunity to diversify holdings. Crypto investors have come a long way from just holding Bitcoin; investors can invest in Layer 1 blockchains, Layer 2 projects, non-fungible tokens (NFTs), flash loans, decentralized autonomous organization (DAOs), yield farming, staking and other innovative and emerging projects and opportunities.

Invest in Layer 1 Blockchains

Investments in Layer 1 blockchains are the most common form of crypto investments. These include coins such as Bitcoin, Ethereum and Binance Chain. Layer 1s are the base layer used for secure transactions and validation. The tokens represent the value of using these blockchains. Layer 1 blockchains also tend to be the safest from hackers and attacks. However, the surge in crypto use has made them slow and expensive to use. This is where Layer 2 solutions come in.

Invest in Layer 2 Projects

Layer 2s serve as a potential solution to the congestion on Layer 1 networks. They build on blockchains that already have a strong demand and serve as a faster, cheaper solution. These solutions are not as secure as their Layer 1 counterparts, but in theory they do not put the base layer at risk. Some popular Layer 2s include the Lightning Network for Bitcoin, as well as Polygon for Ethereum. Investments in Layer 2 tokens are only as strong as the Layer 1 in which they operate on.

Invest in NFTs

Another popular form of investment in crypto is in NFT collections, which are similar to altcoins but represent unique property. Instead of being used to access a network, they tend to work within a community. NFTs are also used for gaming, music and art.

A few NFT collections have seen substantial returns, such as the Bored Ape Yacht Club. However, the majority of collections fail. With the technology being new, an investment in NFTs is very risky. Without a great team, community and roadmap, the collection is likely to falter, and even with those benefits, strong growth is not guaranteed.

Invest in DAOs

A DAO is a new form of business and governance structure that is decentralized and governed by code. By using crypto technology, DAOs do away with the typical corporate hierarchy. Instead of CEOs and shareholders, votes that are weighted by governance tokens held by users and dictate the decisions made by a DAO. Some great DAOs to check out today are:

  • Maker DAO: Provides liquidity to back the DAI stablecoin. 
  • Mirror: Governs a decentralized blogging platform.
  • PleasrDAO: Collects rare NFT artwork that’s culturally significant.

Staking for Interest

The transition from proof-of-work (PoW) verification to proof of stake (PoS) has allowed the more casual crypto investor to earn interest on their coins. While expensive machines and large sums of computing power are required to earn from PoW, PoS allows users to freeze their coins. In return for helping secure the network, users are rewarded with a form of interest, and the riskier coins tend to promise the highest returns.

Best Hardware Wallet for Crypto Investments

An important asset that is often overlooked is hardware wallets, which help secure your crypto investments. While software cryptocurrency wallets help connect you to the many interesting Web3 resources, a hardware wallet helps keep your assets safe from attacks.

Best Hardware Wallet: Ledger

A great hardware wallet to look into is the Ledger Nano S. The device is used by millions of customers to secure their keys and assets offline. This practice helps keep the wallet unexposed to dangerous sites – often referred to as cold storage.

Cryptocurrency Market Outlook

At the time of this writing, both the crypto markets and broader markets have been crushed. With the Fed planning on reducing quantitative easing, as well as raising interest rates, Bitcoin has dropped below $30,000, with most altcoins dropping as well. If you are a believer in buying low, the prices may have begun to look attractive. For the most up-to-date crypto prices, check out our table below.

Is Diversification in Crypto Important?

Diversification is important for investors looking to earn safe, long-term returns. The crypto market has not attracted that style of investor nor has it proven any altcoins that trade in a different pattern than Bitcoin, so diversification in the crypto sector is less effective than in traditional investment vehicles. As the market matures, we are likely to see projects begin to trade as the distinct investments they are.

Disclosure: ²Sum of median estimated savings and rewards earned, per user in 2021 across multiple Coinbase programs (excluding sweepstakes). This amount includes fee waivers from Coinbase One (excluding the subscription cost), rewards from Coinbase Card, and staking rewards. ³Crypto rewards is an optional Coinbase offer. Upon purchase of USDC, you will be automatically opted in to rewards. If you’d like to opt out or learn more about rewards, you can click here. The rewards rate is subject to change and can vary by region. Customers will be able to see the latest applicable rates directly within their accounts
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