The diversification process is important as if you keep all your eggs in one basket; it exposes you to higher risks. If you have been trading in cryptos for some time, you will know that many cryptocurrencies are highly volatile. But volatility is not your enemy. Rather along with volatility, the diversification will help you shield your money from sudden market swings. It will also diminish the losses that could expose you to breaking your account.
Wherever you invest, if you do not strategize your investment, then you are simply gambling. Hence, if you do not consider diversification, you will not be able to cope with the modern market. There are many such instances that showed failing of new projects and investments going down the drain. So, for being a safe player, you must expand your reach to other cryptocurrencies.
Four kinds of coins for your diversification
All the cryptocurrencies are not the same, and there indeed are many ways to classify coins. However, here are four basic classifications that you must remember about before you decide on your diversification strategy. Understanding all these currencies is important for diversifying your crypto portfolio.
Yes, bitcoin is not a group, instead just one currency. But the weight bitcoin carries is mammoth-sized, being the first cryptocurrency and forefather of all the altcoins. This oversized volume exposes it to maximum volatility, but at the same time, is highly profitable. It is like a common thing to do, keep bitcoin in your portfolio as the backbone of your diversification process.
2.Ethereum and the ERC-20
Ethereum was built as an alternative for bitcoin, and it also supports smart contracts. It did not take Ethereum much time to gain fame in the crypto market, and it landed to be the second-best after bitcoin based on the market capitalization.
But Ethereum is not one single currency in the market. A lot of tokens are launched utilizing the protocol called ERC-20. As a result, it offers Ether more strength as crypto. In the years past, Ethereum has gained competition in projects like EOS, Tron, NEO, WAVES, and others. However, Ethereum has remained in the first position throughout.
3.Interest in Cryptocurrencies
Like a few stocks pay dividends, few currencies offer interest for the users. Consider including a few currencies with interests; it will help in diversification as well as help you earn progressive interests.
Chances of earning coins through hard forks and airdrops are also there. Bitcoin Cash, when it was forked from bitcoin in 2017, the bitcoin users had two cryptocurrencies in their wallets after the hard fork. Similarly, when Bitcoin Cash got hard forked into Bitcoin ABC and Bitcoin SV, the users received equal numbers from both the forked currencies.
We all know that the cryptocurrencies face high volatility. This, in fact, is a good factor, but there are times when you feel the need to migrate the risks. This is where the Stablecoins will play a prime role. Almost all the Stablecoins are backed by one of the fiat currencies or a real-time asset.
Some examples of Stablecoins are USD Coin, Paxos, and Tether. Even Facebook has included itself in the crypto market after introducing Libra. This stable coin is backed by many fiat currencies. Remember to add at least one of the stable coins so that you can escape the market stress through stable assets.
You can choose to diversify anytime you want. But diversifying with smaller investments could be more difficult has the fee that is involved is quite high. Suppose you have $500 in cryptocurrency, then you should stick with a few coins, 2-3 should be okay, in the events that you are a trader. The reason behind this is the dilution of your capital when you purchase many currencies.
This can lead to you losing money in the form of fees. If you want to save your money from commissions is using services like Crypterium, that incorporates the 10 top exchanges. This service provides the best rates and commissions that are lower when you purchase. If you want to invest in cryptocurrencies, you can visit bit qt app and start trading early.