The traditionally structured investment portfolio often has an allocation in several asset classes. That means they are not only focused on stock diversification with 4-6 different sectors (20% in energy, 20% in tech, etc), but are also diversified in investment products that may do well independent of other assets. A portfolio solely comprised of many different stocks opens up a lot of risk.
Traditional investment strategies are largely about weathering storms, not necessarily hitting home runs and taking a lot of risk. Additionally, there is a constant debate amongst professional money managers if it’s even worth the effort for the average investor to invest in individual stocks versus buying an index fund or the S&P 500 (Major United States stock index). When thinking about cryptocurrencies and investing in them, it’s difficult to avoid the plethora of options available at our fingertips.
Investing in traditional stocks
Just like stock investing, investing in individual stocks may end up requiring full time dedication to be successful. Success could be defined as simply generating profit with limited risk. But success in the professional money management world also means outperforming the S&P 500 and/or improving risk adjusted returns. The risk involved when investing in single stocks as well as the time required to do the research is high.
The reality is that a diversified crypto portfolio may be a lot riskier than a highly concentrated crypto portfolio of just Bitcoin – similar to how investing in 5 or 10 of your favorite stocks may be a lot riskier than just buying the S&P 500. Consider the risk of having to manage so many different altcoins vs just managing bitcoin.
Investing in cryptocurrency
Most new investors got involved in crypto during the peak in January 2018. Many of these same investors used their bitcoin to diversify into as many altcoins as they could, perhaps thinking they are reducing their risk, when in fact it has likely done the opposite since peak (with the exception of Binance Coin). Diversifying away from bitcoin has largely been a riskier proposition. The test of time and survivability in bitcoin has made it the safest crypto asset available.
At the same time, greater risk often comes with greater reward. Some altcoins might reach incredible heights in terms of market cap and may potentially outpace bitcoin in terms of percentage appreciation from the time you’re considering a new investment in crypto.
Bottom line, if you are an individual with a traditional investment strategy and want to allocate a percentage of those resources into cryptocurrencies, consider this risk:reward dynamic when thinking about diversification in crypto.
This is an article taken from 21CRYPTOS magazine. To get your monthly crypto fix, click HERE for 75 pages of crypto gold from the world’s no.1 digital cryptocurrency magazine.