Sirwin
Sirwin

The Myth of Crypto Diversification

By johnwege | johnwege | 15 Apr 2024


The cryptocurrency market is a place where theories, philosophies, and superstitions run supreme. In its short history, ideas such as 4-year cycles, and dollar-cost-averaging have become ingrained in the minds of investors. But, perhaps there is one investing philosophy that has become the most popular of all. The idea of maintaining a highly diversified portfolio. In this case diversified means keeping a portfolio filled with many different cryptocurrencies. With the hope that it will help balance out your risk and also increase your odds of owning a coin that goes parabolic. After all, your chances of finding that coin increase as the number of projects in your portfolio increases. 

The idea has always been that keeping a highly diversified portfolio not only is the best method to minimize risk, but also the best method for profits. At least that is what we were always told.

But what if having a highly-diversified portfolio isn’t the best method? What if it was just a myth?

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Aside from keeping a diversified portfolio, the other popular option has been to have a highly-concentrated portfolio. Meaning that you keep a very select few coins in your portfolio. Perhaps going Bitcoin only. Or maybe Bitcoin and Ethereum only. The thought is that by having a higher concentrated portfolio, you will also have even more profits. But, potentially more losses as well. There is also the risk of missing out on potential opportunities. In the past, many experts have claimed that a highly-concentrated crypto portfolio isn’t only irresponsible but also opens you up to more risk. It was never the strategy that was recommended to newcomers.

This is how I view having a highly-concentrated portfolio.

Highly-concentrated = high confidence.

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If you find an asset that you truly have incredible potential, why would you waste your capital investing in anything else? Especially in the cryptocurrency market is so full of junk projects. For example, in the stock world, you wouldn’t trade all of your Apple shares for penny stocks. It’s the same in the crypto market. If you truly believe that the name of the game is accumulating as much Bitcoin and Ethereum as possible. Why would you buy anything else?

When you take a higher concentrated position in an asset, it also allows you to earn even higher profits. If you had $5,000 in Bitcoin and it went up by 10%; you’d now have $5,500. But if you split that $5,000 equally into ten different projects worth $500 each and Bitcoin went up, but the others remained flat. Your $500 of BTC would have only increased to $550. This is the benefit of being more concentrated. As the famous investing phrase goes; “The higher the risk, the higher the reward.”

While that phrase is true; I would argue that you’re actually taking on much more risk in the crypto market by keeping a larger portfolio. During the most current bear cycle, Bitcoin and Ethereum both dropped by nearly 70%. However, other altcoins dropped by more than 90%. Once again, that is a situation where being highly diversified would have hurt you.

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Aside from having higher profits, there is one more key benefit that having a higher-concentrated portfolio also presents. For a regular person, the amount of cash that we can invest into the crypto market is limited. This means that it can be difficult to build a substantial position in any crypto project. Our money is being spread out too thin. However, when we are only focusing on a few cryptocurrencies, you will be amazed at how much quicker you can accumulate and reach your goals.

The truth is that keeping a diversified portfolio is great for those who are new to the market and aren’t experienced yet. However, once you gain more experience limiting the number of positions in your portfolio will help accelerate your portfolio growth. I stick to this approach religiously. With a majority of my portfolio in Bitcoin, then Ethereum, and then two small positions in altcoins. It is the strategy that I most attribute to my success in this market, and being able to reach my accumulation goals.

How about you? Do you keep a diversified or highly-concentrated crypto portfolio?

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