Diversifying your portfolio won’t make you rich in crypto — here’s why
Let’s look at this scenario, say you made a profit of $1,000,000 in cash and kept it in your home. If a burglar stole $10,000 from the bunch, you probably won’t notice because the pile of cash still looks the same right? If the $990,000 is your portfolio, the burglar is diversification.
Diversification is a silent eater of massive profits and I will explain more later on.
To understand the reason why diversification won’t make you rich, you have to first understand why “diversify your portfolio” is a thing.
So why is “Diversify your portfolio” given as advice?
There is only one answer. Risk
“Don’t put your eggs in one basket”
-Miguel Cervantes
Miguel says we should do this to be at lower risk to losses. It is not a bad nor good advice per se, depending on who is receiving the advice.
But think about it, why put your eggs in different baskets when you don’t do that in real life? When you go to the grocery store and buy some eggs, you keep them all in one place and carry them with care so they don’t break.
If they do break, you’d have to re-buy and be more careful. This should be how we treat our portfolios.
I was in a space recently and this question was asked,
“I’ve researched about 10 different projects and I love what each of them are building, but is it advisable to invest in them all?”
Many of us have been in this situation. Matter of fact, many are in it right now! My answer to this question is:
For someone going into the market trying to be rich, diversification will do more harm than good.
Here are the reasons why diversification won’t make you rich in crypto
1 The advice is simply not for you.
Diversification is for people with the intention to protect their portfolio, not expand it. This tells us why
Say you had $5000 to invest in crypto between June to August 2020. Diversifying your portfolio could look something like this
Bitcoin: $1000, Ethereum: $500, Bitcoin Cash: $500, Litecoin: $500, XRP: $500, BNB $500, AAVE: $500, SOL: $500, MATIC: $500
At today’s prices, profit + initial capital = around 25x ($125,000)
We can agree $125,000 profit is pretty decent. But let’s look at the second scenario:
BNB: $1000; MATIC: $2000; SOL: $1000; ETH: $1000
At today’s prices, capital + profit = around 70x ($350k).
The thing is here is this, when you earn big on one or two coins, your 5 or 6 other coins put your entire portfolio at risk of less profits. Simply because they may not do well.
Remember that I called diversification a silent eater of profits? Now you can see why.
2 It is more difficult to follow up on the consistency of the project’s team. Following up on the progress of a project could be tedious, how much more 10 or 15 projects?
A wise man once said
“Put all thy eggs in one basket and WATCH (study & understand) THAT BASKET!”
— Mark Twain
3 Rich people did not diversify their way to wealth
Your average financial advisor would tell you straight away to “diversify” but here’s what some of the greatest investors have to say about diversifying:
“A lot of great fortune in the world have been made by owning a single wonderful business. If you understand the business you don’t need to own many of them”
-Warren Buffet
“Many financial advisors recommend you diversify for your own protection. What they fail to tell you is that it is also for their own protection. Since most financial advisors cannot tell you exactly which stock or mutual fund is a great investment, they tell you to buy a bunch of them”
— Robert Kiyosaki
Warren Buffet’s quote can be translated to:
“A lot of great fortune in the world have been made by owning a single cryptocurrency. If you understand the cryptocurrency project you don’t need to own many of them”
Focus makes us better investors. Focus brings knowledge and understanding. Knowledge and understanding brings conviction.
Great investors move (take actions and make decisions) with conviction.
