Diversification is a technique that reduces risk and achieving long-term financial goals. This technique allocating investments in different crypto assets. It aims to minimize losses by investing in different asset each of which will react differently to the same time. Diversification is important because it also creates better opportunities.
Lets say your balance account is 100 USDT, so there are two options: Buy Bitcoin only or buy Bitcoin and Matic worth 50 USDT each. If you choose the first option, then the price of BTC turns down 10% in the next month. Of course, the value of your balance is now only 90 USDT. Lets compare if you choose the second option with the same assumption, the price of BTC has fallen by 10% in a month. The difference is, now at the same time, it turns out that the price of Matic has gone up by 20%. Then, your balance position will be 45 USDT in BTC and 60 USDT in Matic, so your total balance is 105 USDT. In this case diversification tries to protect against losses. Diversification is thought to increase the return of a risk-adjusted balance. This means investors get a bigger return then risk they are taking.
There are several types of coins that you can use for diversification, which include:
- Bitcoins, because this crypto asset has a large market capitalization value, can provide significant profits when the market is bullish.
- Mostly ETH which functionally is a coin used in DeFi traffic. The utility value is quite high, so the demand for this coin is predicted to increase in the future.
- As the name implies, stablecoin does not have volatile conditions like crypto assets, so it is suitable for use as a diversified asset when the crypto market is bearish.
- The coin that bases on your analyze in technically and fundamentally for the long term will continue to be bullish, e.g. Matic
Diversification reduces the amount of risk that you are exposed to maximize your returns. While there are certain risks you cannot avoid such as systematic risks, you can hedge against unsystematic risks. Most important you have to know about your risk profile, so you can estimate the balance while you want to invest. Keep Do Your Own Research before investing.