As of recently cryptocurrencies (Bitcoin in specific) have been on a tear and everyone wants a piece of the pie. All sorts of investors seem to be flooding in daily. Several, came from traditional investing and understand simple principles that are often implemented to reduce risk regardless of the size of the portfolio. Although some may know the meaning of the word you may not necessarily understand how to implement diversification across your cryptocurrency portfolio.
With several alternatives to the main Bitcoin currency numerous are fly by night operations designed to defraud investors of their hard-earned money. Think Bernie Madoff, Ponzi schemes.
Is Cryptocurrency a fad or is it here to stay?
Many are under the impression the cryptocurrency craze is just a fad, a mere bubble that is about to burst. With the price per bitcoin at over $2,800 it is undeniable that money is being made regardless. Cryptocurrencies are held by addresses thus allowing for truly anonymous transactions.
Unfortunately, a bad rap is given as these currencies may be used as an avenue to traffic various illicit activities due to the anonymous nature of transactions and it being unregulated by the government. The online community has been backing it and making it quite relevant. Several coins will hold some value and continue to show positive returns in popular opinion.
There are several different ways to diversify your cryptocurrency portfolio and it is very easy to put all your money in new coins with the hope that some may rise to the price of the ever-loved Bitcoin. Often, this is not the case as investors can be easily misled or run through an excessive amount of volatility.
It would never be advised to put all your investable assets in cryptocurrency.
50% Core – Low Risk: In the current marketplace, there are only two cryptocurrencies that would fit the cryptocurrencies that are currently offered. In the low risk category, we would find Bitcoin and Ethereum. These two cryptos alone have shown investors high returns.
25% Satellites – Moderate Risk: This sleeve of the portfolio could be comprised of lower risk but more volatile and thinner traded coins. The ripple and new bitcoin cash are the largest cryptocurrencies by market capitalization aside from the core options. It may be especially smart to get into bitcoin cash early as that will stay around.
25% Satellites – High Risk: Higher risk options can include Initial Coin Offerings (ICO’s) and issued cryptocurrency under low market capitalization coin alternatives. Be very careful with this option as it includes a high level of risk. In depth research is necessary as several of these coin offerings are not very legitimate.
There are many different types of exchanges. Here are a few tips to keep in mind while looking for an exchange to conduct your transactions.
The reputation of the exchange is one of the most important factors to consider. Read reviews about peoples’ transactions as well as reviews on the exchange itself. Reddit may be a great place to start your search.
Understanding fees is also very important. Many exchanges have fees varying on different transactions, deposits, and withdrawals. These fees can generally be found on the exchanges website and should be researched thoroughly.
Exchanges offering limited payment method options may be a turn off to you. Many want the ability to use their credit card, debit card, PayPal, cryptocurrencies, etc. You want a wide variety of currencies and conversion options ideally.
The exchange websites vary on verification requirements. Most that allow United States citizens access require identification upon withdrawals. Some will allow the user to stay completely anonymous.
Often the exchange rate varies drastically depending on which site is being used. These rates can vary upwards of ten percent! Be sure to evaluate this as you can lose an incredible amount just off the purchase.
Buy and Hold Trading Strategy
A very popular strategy for crypto investors is to time market purchases on currency lows and selling for profits at higher price points. Obviously, this is the ideal scenario for any strategy however, it is better to take a long-term hold approach especially with cryptocurrency. As the world starts to adapt to the concept of a non-regulated currency we will find that the value of certain coins will continue to rise. The best concept is to dollar cost average in different currency lowering your average cost per coin. Ideally buy more when they drop.
Remember! Investing in cryptocurrency has various degrees of risk. Do not put all your eggs in cryptocurrency as it may be very volatile. If you put a small percent into a crypto portfolio, proper due diligence and diversification can allow for healthy returns uncorrelated to stock market events. Watch a lot of sports? You can also bet on sports games with crypto! This allows you to gamble, potentially make higher returns while gaining the benefit of the growth in that currency.