A Beginner’s Guide to Creating a Diversified Digital Asset Portfolio

The Basics

When creating an investment portfolio, traders should be familiar with the concepts of asset allocation and diversification. Diversification relates to the distribution of your investment funds across different assets or sectors within the digital asset markets (ie. DeFi, GameFi, Stablecoins, Altcoins, etc). Technically, cryptocurrencies are regarded as a single asset class. But in a cryptocurrency portfolio, you can diversify further across products, coins, and tokens that present different goals and use cases. For example, a trader could allocate their portfolio with 40% bitcoin, 30% stablecoins, 15% NFTs, and 15% altcoins. There are many strategies and specific allocations traders can implement when building out their portfolio. The allocations they make are based on their risk/reward appetite and the perceived potential value of the assets they are investing in. Most traders and investors are looking to beat the overall market with large gains.

Risk Vs. Reward

However, a highly diversified portfolio can lead to more average returns than a successful yet riskier concentrated portfolio. In a highly diversified portfolio, worse performing assets can balance out high earning assets leading to a mediocre overall return that comes with the benefit of mitigating potential large losses. With dedicated research and a little luck, concentrating on a few specific high growth potential assets can lead to large gains but this strategy runs the risk of major losses, should the assets perform poorly. This is why some degree of diversification can be preferred when building a strong, long term portfolio.

Managing a Diversified Portfolio

Managing a diversified portfolio also requires more time and research of investors. To invest successfully, traders should understand what they are buying and why certain assets have the potential for growth in the future. With a large diversified portfolio, the chance of understanding every asset’s potential value decreases. If a trader’s portfolio is made up of assets across different blockchains, they may also need to use multiple wallets and exchanges to access all of their assets. This also requires additional time, knowledge, and effort to maintain a high performing portfolio. Simply put, the main idea behind asset allocation and diversification strategies boils down to not putting all your eggs in one basket. Combining asset classes and assets that aren’t correlated is very effective way to build a balanced portfolio.

Asset Allocation

The main purpose of devising an asset allocation strategy is to maximize the expected returns while minimizing the risk. Distributing risk between asset classes may increase the efficiency of the portfolio. As the markets are highly correlated with bitcoin, asset allocation strategies should be applied to digital asset portfolios with caution.