This is how you can diversify your crypto portfolio

How you diversify your crypto portfolio can have a big impact on the returns you get. In this article, you can read more about the idea behind diversification.

Important information: None of what is written in this article should be construed as financial advice.

It is no secret that the crypto market can be very volatile at times and that which strategy you choose for your investment can have a big impact on your returns. Just as you would diversify a portfolio on the stock market, you should also diversify your crypto portfolio. The advantage of diversifying is that you can spread your funds to reduce both risk and volatility. If one investment goes bad, then one of your others can make up for any losses.

Want to get started with crypto? Read on to learn how to buy cryptocurrency!

Pros and cons of diversifying your portfolio

There are advantages and disadvantages to diversifying your portfolio. As we mentioned above, some of the benefits are that you spread your funds, thereby reducing risk and volatility. Having a certain part of your portfolio in stablecoins like DAI means you also always have the opportunity to buy in when there’s a big drop in the market.

The downsides of having a diversified portfolio are that the more diversified it is, the closer it will follow the market’s total returns. Investors and traders like to beat the market over a period of time, but a diversified portfolio will lead to more average returns. A diversified portfolio also requires more time from you as an investor. In order to maintain a diversified portfolio, your portfolio should be rebalanced from time to time so that you don’t have too much bet on a single portfolio.

How do I diversify?

How you choose to diversify your portfolio is entirely up to you and depends on how much risk you want to take. For some, the right thing to do might not be to diversify, but to only hold BTC. For others, the right thing to do might be to hold both BTC and ETH, while for someone else, the right thing to do might be to hold a mix of lots of different cryptocurrencies. In general, BTC is considered low risk and the least volatile cryptocurrency, while altcoins such as ETH, ADA, LTC and XRP come with higher risk and volatility. The stablecoin DAI should always be $1 and therefore entails very low risk.

Examples of diversification by risk:

Rebalancing your portfolio

In order to maintain a diversified crypto portfolio, you will need to rebalance from time to time. How and how often you choose to do this is up to you and there is no one-size-fits-all.

An example of rebalancing the higher risk portfolio above might be to rebalance each time your DAI portfolio goes below 15% or above 25%.

If the market rises, your portfolio might look like this:
31% BTC - 24% ETH - 12% XRP - 11% LTC - 13% ADA - 9% DAI.

Then you can sell off your excess to DAI so that you go back to the original 30/20/10/10/10/20 spread, leaving you with less crypto but more DAI which means that you will be liquid in the event of a fall and can then buy in again.

Example of building a crypto portfolio:

In this example, we have chosen to use a DCA (Dollar Cost Averaging) strategy, where you spread the amount you want to save and invest over time.

PS! Did you know that Firi has a savings product similar to DCA? It’s called Crypto Saving, andyou can easily start saving today by creating a Firi user profile here!

We want to invest a total of $1000 divided between BTC, ETH, XRP, LTC, ADA and DAI, and we start our investment at the worst possible time, January 1, 2018, which was the peak of the previous “bull run”.

On the 1st of each month, starting January 1st, we invest $15 in BTC, $10 in ETH, $5 in XRP, $5 in LTC, $5 in ADA and $10 in DAI. By investing $50 every month, we have invested a total of $1000 after 20 months and are thus fully invested by August 1, 2019.

On August 1, 2019, our portfolio looks like this:

BTC 0.0482163937
ETH 0.8549478024
XRP 230.1351019
LTC 1.483415737
ADA 1247.539974
DAI 200

Total value: $1164.74

From here, we have rebalanced our portfolio back to 30% BTC, 20% ETH, 10% XRP, 10% LTC, 10% ADA and 20% DAI each time the DAI portfolio falls below 15% or exceeds 25%.

1. February 2022, our portfolio looks like this:

BTC 0.05219485544
ETH 0.4986028342
XRP 1097.983231
LTC 6.13814056
ADA 637.7938027
DAI 1339

Total value: $6696.31

By using a DCA strategy and rebalancing, this portfolio has delivered a return of 569% or $5696.31 over three years. This portfolio will now have a DAI portfolio that is larger than the total amount we started investing. Now, for example, you can withdraw your $1000 and rebalance again so that you’re only investing “house money”.

If, on the other hand, you had chosen to invest all $1000 only in BTC on January 1, 2018, without any kind of DCA strategy or rebalancing, today you would be left with a total value of $2794.40 and a return of 179% or $1797.40.

The development over time with DCA and rebalancing would have looked like this:

If you want to get started building your crypto portfolio, you can read about how to buy various different cryptocurrencies here!