The Illusion of Diversifying in Cryptocurrency
Anyone who is the least bit interested in cryptocurrency is well aware of sometimes wild fluctuations in the market. We’ve seen it happen time and time again, and yet still haven’t learned our lesson when it comes to how best to insulate ourselves from losing too much.
Some people try to combat these fluctuations by “diversifying” their crypto holdings, choosing a number of different alt coins in hopes that one may offset the loss of others. This strategy though has its flaws, and here’s why.
Cryptocurrencies, like many other assets in the world, are inextricably linked across the board. Think about the financial crisis of 2008, not only did the real estate market suffer but plenty of other aspects of the economy were also affected, even other global economies as well.
Cryptocurrency seems to be no different, one when main coin takes a dip the others follow. As such, it becomes hard to justify a strategy that relies on purchasing a number of different coins to hopefully save you from the dreaded dip.
It’s easiest to see how these coins fall and climb in tandem throughout many larger and more popular coins such as ETH, BTC, XRP, Bitcoin Cash, EOS, etc.
We can see from the graphs on the above image that these leading cryptocurrencies follow nearly identical volatility. We see this pattern across a number of other cryptocurrencies as well.
Although this strategy of diversifying by sheer variety can pay off, in crypto it’s often not the case since so many coins follow similar paths. That’s not to say that some coins will fluctuate seemingly independent from the bigger players, but creating a strategy to capitalize on such unexpected gains is like creating a strategy to consistently win the lottery — it just doesn’t work.
The close link between cryptocurrencies makes one wonder, is there even any way to strategize when it comes to trading cryptocurrencies? That’s a great question…
In reality, everything is speculation. While analysts provide insightful forecasting, they simply do not have crystal balls in which to gaze into where they clearly see the future fluctuations of varied assets. While they can make educated and informed predictions the fact remains that you can still catch a downtrend that no one saw coming.