Whether you are building an investment portfolio for the first time, or are thinking about introducing digital assets into your current portfolio, crypto can provide a great opportunity for diversification.
With this being said, it is important to understand the importance of portfolio diversification, the crypto market as a whole, and how you should approach including crypto within your portfolio.
The importance of portfolio diversification
Whilst you likely already have an idea of the importance of portfolio diversification, going over these investment fundamentals will allow you to make a better decision when it comes to investing in crypto.
Essentially, diversification ensures that you aren’t putting all of your eggs in one basket. It reduces risk by investing in instruments across a range of types and areas – these all will be impacted differently by external factors, and diversification as a result reduces unsystematic risk. When it comes to building a portfolio that reaches long term goals, diversification is crucial. However, it is important to note that whilst diversification will reduce risk, this also can result in reduced returns.
How does cryptocurrency work?
Crypto refers to digital or virtual currencies that use cryptography in order to avoid risks of counterfeit and double spending. Most of the cryptocurrencies available operate on blockchain (a network of computers, or nodes) and as a result are decentralised.
Cryptocurrencies began with the invention of bitcoin – to this day, this cryptocurrency remains the largest by market cap, and has seen immense growth . Following the invention of bitcoin, numerous altcoins have been introduced to the crypto market – popular examples include Ethereum and Litecoin.
The buying and selling of cryptocurrency is facilitated by online exchanges – an example of this is trading bitcoin with Independent Reserve. In addition to exchanges, crypto can be traded on a peer-to-peer basis.
Why you should include crypto within your investment portfolio
Given the waves in popularity that cryptocurrencies such as bitcoin have gone through, you might be wondering whether or not crypto should form a part of your portfolio. Ultimately, the answer that many experts have is yes — it should.
Many experts agree that crypto and blockchain technology look to be sticking around for the long term, with Dapp and blockchain developments evidently only just getting started. Bitcoin provides clear examples as to why it has value – its finite amount reduces problems of inflation, fast transaction speeds, low fees, widespread adoption and more, to name a few. On top of the advantages that many cryptocurrencies have, cryptocurrencies like bitcoin also have a low correlation with almost all other traditional assets.
However, the immense volatility of crypto means that investing in it comes with significant risk. While bitcoin reached all-time highs of $20,000 USD in 2017, its value more than halved following this. Today, it is once again reaching new heights, but only time will tell whether the momentum continues.
Overall, depending on your risk tolerance, investing anywhere between 1% and 5% can provide further portfolio diversification, while allowing you to see benefits in potential price hikes. This is a percentage that also ensures investors will still achieve their financial goals in the event of a crypto market crash. With this being said, making the decision on whether you want to invest in crypto will come down to your own research and how you see the cryptocurrency space.
Guest Post Contributor
(Disclaimer: this material is provided for example purposes only. It should not be construed as investment advice. The opinions expressed are the personal views and experience of the author, and no recommendation is made.)