A Case Against Diversifying Crypto Portfolios (For Now)
With high market risk, low diversifiable risk, and insufficient data, it’s best to zero-in and overweight the best projects.
Disclaimer: Nothing written here is financial advice nor should anyone take my thoughts as financial advisements. These are mere opinions; you should consult with your financial advisor before entering into any transaction.
To premise this byt3, I prefer to invest in projects that will generate value over time (and view the technology as only a fraction of the total equation) so day traders need not read any further. Secondly, I only put in what I could afford to lose completely in the crypto market in order to alleviate any and all emotional decisions. This amount is always going to be different based on a person’s risk profile and personal circumstances. With that out of the way, here are some arguments as to why overweighting certain crypto assets is logical:
High Market Risk
In the 24 hours that followed the singular SEC announcement to delay their decision on the VanEck-SolidX Bitcoin ETF until September, Bitcoin shed 10% of its value and the total crypto market cap shed a whopping 14%. To appreciate this perspective, consider that the largest single-day drop of the Dow Jones Industrial Average during the Wall Street Crash of 1929 was “only” 12%. It’s no secret that the market is still nascent with projects that were all formed in roughly the same decade and thus rising and falling on the same tide. Until projects start to measurably demonstrate their value through both utility/network effects and regulations progressively facilitate adoption, it’s going to be a wild ride for a bit…
Low Diversifiable Risk
While diversification is tried and trued for equity investments, there is one key ingredient missing in crypto: low correlation. Anyone who has been in the market for more than a week has probably experienced the crimson or evergreen tides (and rarely in-between) on their favorite market cap site. Without the ability to diversify away risk made possible by low correlation between coins, the efforts are arguably futile.
While pricing, network, and GitHub data are readily available, real traction data is lackluster at best. Equity markets benefit from a plethora of tools such as Bloomberg Terminals, Gartner, CBInsights, etc. to make the best investment decisions and portfolios based largely on the measurable business traction a company is achieving. The fog is still heavy in crypto markets further fueling the speculative discourse that dominates the majority of your broader Telegram feed. This makes diversification more of a spray-and-pray than a sound strategy and dilutes time better allotted to conducting deep research and performance tracking of a few promising projects.
More Like Venture than Equity Investing
Lastly, crypto investments are far more akin to seed-stage investing (with the exception of maybe BTC/ETH given there longer history & scale) making sound valuation techniques something to aspire to, but always to question in the current environment. On the bright side, unlike startup investing, at least we get stop protection in a 24-hour market for any major scandals/bad news/etc.
In conclusion, while some diversification is certainly not a bad thing (especially when sleep is at stake), conducting thorough due diligence with the time you have on projects that you have unique insight or expertise into can yield a higher payoff than applying a broad brush.
This video is always a good reminder that there is no way around the direct correlation of quality and time. Crypto projects are no exception.
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