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By neglecting the rules of diversification, the investor risks losing a significant part of the capital. The optimal distribution of assets and a balanced investment portfolio is the protection of capital and the opportunity to increase funds. We will tell you what diversification is and why it is difficult to achieve success in the crypto industry without it .
What is diversification in simple terms?
Understanding what asset diversification is is worth it before you start investing in order to properly form a portfolio. In the crypto industry portfolio diversification is the distribution of funds between different assets, such as cryptocurrency , stocks, bonds and others. If an investor invests only in cryptocurrency , a diversification strategy is still needed, since crypto means different types of tokens , with different capitalization, liquidity, prospects and risks.
In simple words, investment diversification is what allows you to find a balance between assets with high and low risks, diversify your portfolio, and protect your capital in the event of a sharp decline in the value of one of the assets or several at once.
It is worth noting that investors themselves are different, and they choose different risk diversification strategies. Conservative investors want to preserve their funds first and protect capital during a recession, so they choose the most stable assets. Moderate investors are ready to risk a small share of their capital in order to make a profit, they invest most of their funds in stable assets, and buy risky, but promising in the medium term, tokens with part of the money . Finally, aggressive investors want to make money, so they are ready for serious portfolio drawdowns in case of failure, they invest most of the funds in risky assets that they believe in.
Why should you not neglect diversification?
Diversification is what helps investors survive in times of crisis and drastic changes in the market. The cryptocurrency market is the most unstable among all financial markets, the crypt has a high volatility, and the coin rate can change in a matter of hours. The market reacts sensitively to a variety of news, but a balanced portfolio will allow a trader to keep a share of capital, even if one of his assets falls in price significantly.
By correctly distributing assets, the investor receives the following benefits:
Reduces potential losses. By investing all your funds in one token , you can be left without capital in the event of a recession of the selected crypto.
Empowerment. Even a small start-up capital can be wisely distributed among several assets in order to improve your prospects in the future.
Long-term capital growth. Portfolio diversity will not allow an investor to miss a significant increase in the price of a particular asset class.
Types of investment portfolio diversification
Diversification on the stock exchange can be of different types, classified according to several criteria. By class, assets can be traditional and alternative. The traditional ones on the exchange include stocks and bonds, while the alternative ones are cryptocurrencies , private stocks, derivatives .
The current theory of the investment portfolio suggests the existence of two strategies for diversification and asset allocation – strategic and tactical. Strategic is suitable for passive investment. Portfolios created according to this model are balanced in terms of risk and profit. The task of the investor in this case is to collect assets that provide a balance between the expected risk and profit in the long term.
Tactical asset allocation is more often used by active investors, they invest a significant part of their funds in assets that can “shoot” in the near future, bringing good profits.
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