As a trader, your goal is to get the maximum out of your investments. But in crypto trading, the risk is constant, and you have to deal with it.
There are several things you can do and diversifying your portfolio is one of them. Diversification is a great strategy for anyone looking to reduce risk on their investment for the long term. The logic behind this is easy: separate assets do not always have their prices move together.
Or, maybe they do? That's when we talk about naive and optimal diversification. Naive can be counterproductive sometimes, as picking winners at random is simply not as sophisticated as diversification methods that use statistical modeling.
We asked our customers on Twitter about their favorite diversification strategy. This voting shows that all three approaches are almost equally favored.
While 3 assets make you less vulnerable to market risks than relying on one asset, a set of 10 coins would provide you with even more flexibility.
Under the optimal model, we focus on finding assets whose correlation with one another is not perfectly positive. Taking this way, you minimize risk and maximize return by computing complex models and algorithms in an attempt to find the ideal correlation. Keeping all eggs in one basket is not safe.
Based on the law of large numbers, both diversification methods can lower the risk of your portfolio, even if you choose the naive one. Besides, it allows you to increase the returns from cryptocurrency projects.
That being said, we invite you to walk through the profiles of various crypto coins. This way you’ll be able to make your own conclusions about their potential in the future and plan your perfect diversification strategy.