Only a few short years ago, it was widely accepted that bitcoin was the only game in town. However, with the proliferation of alternative coins on the market over the past three years, some of which have seen solid, sustained gains, the term “cryptocurrency diversification” is popping up more and more.
The idea of putting all of your eggs in one basket is looking increasingly old-hat, especially as some of the world’s most well-known and savvy crypto investors have loudly extolled the virtues of spreading investments out across alternative coins. However, if you’re looking for a long-term strategy, does diversification really make that much sense? Let’s take a look at the pros and cons of diversifying your cryptocurrency portfolio to find the answer.
The Pros of Diversification
On the surface of things, the pros of crypto diversification seem obvious. Investors of all stripes sensibly claim that having a diverse portfolio is a hedge against risk and market volatility. This is certainly true when investing in stocks or forex, where there are millions of assets to choose from which all have their own advantages and disadvantages when it comes to market volatility.
As mentioned, diversification has become more popular as the market for altcoins has itself diversified. The existence of more stable coins such as Tether and Ethereum presents genuinely viable investment opportunities that go beyond bitcoin, allowing people to offset the intense volatility of BTC.
As a result, brokerage platforms and exchanges that can offer a greater number of cryptocurrencies to trade and speculate on have a key advantage. This is clear when one conducts research on the leading trading platforms. A key feature of a Forex Broker comparison between FPMarkets and FXTM is the different coins offered by each, showing that the industry experts know investors in 2020 want the opportunity to diversify.
After the shocks seen by BTC in recent years, it makes sense to spread your investment out across altcoins that are more likely to retain some of their value in the event of an inevitable bitcoin crash. What’s more, investors with holdings across multiple currencies are more likely to gain in the event that one of those altcoins experiences a dramatic price rise, as Ripple and Chainlink have done in 2020. All of this suggests that diversification is a smart choice.
The Cons of Diversification
Of course, this isn’t the full story. As other cryptocurrency experts have explained in the past, diversifying your crypto holdings does not necessarily offer the same benefits as diversifying your stocks and bonds. One of the main reasons for this is that the cryptocurrency market is largely linked, and very few coins actually diverge from bitcoin in terms of their nature, code, or market appeal.
When bitcoin crashes, as it did in March 2020, every other major cryptocurrency tends to crash with it, albeit to varying degrees. Not a single major altcoin emerged from this spring’s crypto crash unscathed, demonstrating the lack of potential for diversification to protect you from general negative market sentiment. In addition, no other coin has ever come close to experience the rises associated with bitcoin.
While bitcoin has been hovering around $10,000 for much of this year, the next most valuable coins don’t even come close. Maker, the second most expensive coin, has hovered around $600 throughout the summer. Following that is Ethereum, which has been stuck at under $300 since 2018.
As a result, some analysts have calculated that someone who kept all of their investments in bitcoin over the years would have consistently seen better returns than someone who split their investments across five or six altcoins. When one asset holds such disproportionate market dominance, there is only so much that diversification can achieve.
Diversification has its pros and cons. For cautious investors with a long-term outlook, it offers a chance to get on the ground floor and to hedge your bets against bitcoin. For those who are drawn to bitcoin because of its volatility, diversification does not make much sense.
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