Risk Management

How to Diversify Your Crypto Portfolio - Strategies to Limit Risk

November 25, 2022
6 min

The blockchain landscape is dynamic and ever-changing. Learning the nuances of cryptocurrency is like learning a new language - except new phrases are added every few months, and words can mean different things to different people. 

Entering this new and dynamic market can be scary, especially for those who are used to traditional investments like stocks and bonds. But if there is one age-old advice common to traditional and crypto assets, it's that diversification is key to a successful portfolio. 

It pays to diversify your crypto portfolio and limit risk. In this article, let's discuss how. 

Why is Crypto Portfolio Diversification Important?

Think of investing like job hunting. In job hunting, you don't send your resume to only one company, so why would you put all your money into one investment? 

Concentrating your portfolio on a few assets is extremely risky. If one of those assets crashes, your portfolio will suffer too. 

Additionally, diversification stabilizes your portfolio returns. Although you won't get the maximized results of one skyrocketing stock, your portfolio won't experience its risky ups and downs either. 

Diversification in crypto is crucial as its novelty and volatility make its market especially risky.

The market experiences market crashes, crypto market winters, or even malware attacks. By spreading your investments across different coins and crypto projects, your portfolio is less exposed to asset-specific risk. 

You can weather any storm and grow your portfolio.

Knowing the Seven Crypto Classes

In crypto, not all tokens are the same. To create a winning crypto portfolio, you must understand what your portfolio is made of.

Here are the seven asset classes in crypto and what to look out for in each.


1. Payment tokens

Payment tokens function like cash, often used to pay for goods and services. Many of the most popular cryptos are payment tokens like Bitcoin and Ethereum.

Consider payment tokens accepted in many merchant market shops and has fast transaction speed. Although admin fees are expected to run the network, expensive transaction fees do not appeal to users. The lower the transaction fee, the better. 

These three factors make or break a payment token's integration with mainstream technology - and going mainstream is a crypto's dream come true!

2. Non-fungible tokens (NFTs)

NFTs indicate ownership or right to a specific asset like an art piece, music, or a video clip. 

If you have an eye for art and market trends, NFT investing may be for you. In purchasing NFTs, check the creator, uniqueness, and income potential (i.e., you could ask others for payment to view the piece). 

Carefully read the terms and conditions of buying NFTs. Ensure you understand the license agreement, so you know your rights in the purchase.

3. Utility tokens

Utility tokens grant holders premium access to goods, services, or rewards/discounts that the project will launch in the future.

Many don't consider them investments, but they can grow in value when the token becomes trendy or in demand. 

Be careful with the risky redemption terms, so you are fully aware of what you're availing. 

4. Governance tokens

Governance tokens enable holders to vote for decisions concerning a blockchain's operations.

For example, the former powerhouse Terra network uses a governance token, Luna. In 2021, Luna holders voted on burning tens of millions of luna tokens and minting millions of new TerraUSD stablecoins. 

In investing in governance tokens, study the total token supply and distribution. Some projects release increment supplies of governance tokens in varying timelines which can synthetically inflate the project's market value.

5. Security Tokens

Security tokens are divided into:

  • Equity tokens: When you own one, you become a shareholder and can have a say in management decisions or are entitled to dividends. 
  • Asset-backed tokens: These are backed by real-world market assets like art, carbon credits, commodities, or real estate. Think of them like derivatives.

Evaluate security tokens like how you evaluate a traditional company. Consider its product-market fit, company performance, and leadership. If it's an asset-based token, evaluate its underlying security. 

6. Gaming tokens

Users earn gaming tokens by completing tasks or winning in blockchain games.

An example of this is Gods Unchained (GODS) token - a blockchain-based gaming token rewarded to players who win duels against others in a Hearthstone-like trading card game.

The crypto gaming industry is very new so expect wild market price swings in many projects. Look at their game quality and in-game economics. Successful gaming projects are enjoyable and have reasonable minting and burning mechanisms to support their current market value.

7. Basic Attention Tokens

These tokens pay users for their attention in ads and distribute advertising money between advertisers and publishers.

It aims to create an advertising experience that is both transparent and decentralized while benefiting both advertisers and consumers. The most popular, BAT, is affiliated with the Brave browser network.


How Would You Diversify Your Crypto Portfolio?

A well-diversified crypto portfolio contains multiple types of crypto with different market use cases in various industries and countries. 

There are many cryptocurrency projects out there. Choosing what to add to your portfolio can be a lot of work. Here, we break down the critical factors you must consider in creating a well-diversified portfolio and limiting risk. 

By Blockchain 

Many successful crypto projects are blockchain networks running smart contracts. Smart contracts can be used to launch decentralized apps or new cryptocurrency tokens. 

Each blockchain has pros and cons, so investors typically spread their funds around several of them. Some of the well-known blockchains are the following: 

  • Ethereum (Crypto: ETH)
  • Solana (Crypto: SOL)
  • Cardano (Crypto: ADA)

Blockchain technology provides many companies with opportunities to grow and explore new markets. If you want to bet on blockchain's future market growth, buy companies exploring blockchain usage, especially in cloud computing, e-commerce, and AI. 

But remember the risks.

Study the blockchain's functionality, adoption, and security. The blockchain you choose impacts the underlying success of your portfolio. 

By Use Case

Not all cryptocurrencies are used the same way. Knowing the use cases of different cryptocurrencies helps you decide which projects to include in your portfolio. Here are a few well-known crypto use cases:

  • For low-cost, often untraceable, payments anywhere in the world;
  • Smart contract capabilities enabling decentralized apps;
  • Decentralized finance (DeFi) platforms providing blockchain alternatives to traditional finance institutions (i.e., banks);
  • Metaverse platforms where users can explore and interact in a virtual world.

Assessing cryptocurrencies based on different use cases requires extensive research on their existing projects, market trends, and market growth potential. 

Better yet, consider crypto projects whose goals and functionalities fall under your interests, expertise, and investing goals. If you like games, consider gaming coins in your portfolio. You lessen risk and make a more informed decision since you know and enjoy it.

By Industry

You can also diversify your crypto portfolio across different industries. Industries grow at different rates, so it is vital to study market trends to profit from any emerging growth. 

Check the following industries being disrupted by blockchain technology: 

  • Supply chain: Blockchain help tracks logistics and shipping records of products from start to finish without a centralized body.
  • Healthcare: Blockchain would enable a comprehensive study of macro-level and patient-level clinical data, allowing for better medical service for everyone. 
  • Cybersecurity: Blockchain provides end-to-end encryption and privacy.

A rule of thumb is to include crypto projects with bullet-proof use cases in your portfolio. Often, these projects fall under emerging industries. You lessen any risky speculative investing and are forced to have a more solid understanding of your portfolio investments. 

By Country

Bear in mind that countries have varying sentiments and regulations on cryptocurrency.

Make sure you only invest in projects under markets where crypto innovations are encouraged and expanding.

You don't want your money stuck somewhere cryptocurrency is banned!  Binance, for example, was initially headquartered in China but had to relocate before the Chinese government imposed strict regulations on cryptocurrency trading. 

Many currency crypto startups are based in London, New York, Miami, and Amsterdam due to their positive cryptocurrency regulations and continuous efforts to adopt blockchain technology.

How to build (and maintain) a well-balanced crypto portfolio. 

Think mid to long-term.

Regardless of your investment experience, don't expect to find a magic bullet to turn profits in the market instantly. Choose a solution with a long time horizon to cope with the risks. Going in and out of the market is not a wise decision either. Your portfolio could be losing money on too many fees! 

Rebalance your portfolio carefully.

Rebalancing your portfolio according to your risk appetite and investing goals is essential also in crypto world. After deciding the proportions in your portfolio, regularly double-check if your portfolio is still following the desired asset allocation, as their values inevitably change over time. 

Avoid FOMO.

Successful investing rely on facts and logic, not emotions. Build a portfolio based on a long-term thesis and quality research. Believing in trendy investing advice or fads is not a sustainable investment strategy! 

Consider automated crypto investment solutions. 

Many investors are curious to dabble in cryptocurrency but don't know where to start. Automated crypto investment solutions simplify crypto investing by letting computer programs trade cryptocurrencies on users' behalf. 

Peccala's trading engine, for example, offers high-risk and medium-risk AI-led trading strategies, managing investor funds 24/7. The beauty of investment solutions like Peccala is that their payment is tied to your portfolio success. Their performance fee structure means that they only take a commission from the profits, and only the profits, that you make

Unpredictable market shifts and risks are realities in crypto. Your best shield is creating a well-balanced and diversified portfolio that lets you enjoy riding the growth of the crypto market while protecting your bottom line.

Remember, there's no such thing as being overprepared in investing!