Portfolio Diversity in Crypto

Diversification in crypto helps stabilise returns and take advantage of relative movements between different sectors of the cryptocurrency space. As crypto is likely to soon be a mainstream investment instrument, there are many who will advise you to only buy Bitcoin. I’ve seen many social media posts on how owning 0.1 BTC will make you a millionaire! I hope the facts presented below will make you think otherwise.

To illustrate my argument, let’s compare investing the Covid19 stimulus payment that most US citizens received in March 2020. If you invested the U$1,200 in one cryptocurrency as per the chart below, you would be holding a fair amount of USD as of today.

Bitcoin (BTC)Ethereum (ETH)Binance (BNB)Cardano (ADA)
Your purchase for U$ 1,2000.1928338.8888128,000
Price as of today (27/3/2021)$10,412$14,995$26,100$9,441
Conservative prediction 1yr$100,000$20,000$750$10
Your holding in 1yr$19,283$177,777$75,000$80,000
27th March 2021

However, when you compare the future growth, the numbers look very different. To be a millionaire by holding a mere 0.1 of Bitcoin, the unit price needs to reach approximately U$ 5.5 million. As per the stock to flow chart credited to PlanB, Bitcoin will only reach U$ 1 Million in 2026, and 0.1 BTC will be worth only U$ 100,000. I am guessing, someone missed a zero in their calculation.

Let’s look at why some investors are pushing you to buy Bitcoin. It’s the age old practice of every stock market trader; to dump when the price is high. They want you to buy Bitcoin to raise its demand, thereby driving the price higher. Once it reaches an all time high, they will be the first to dump their holdings. The plummeting prices will then drive retailers to will panic sell at the bottom from fear of losing out. Therefore, the strategy isn’t to just buy Bitcoin, but to diversify.

Diversity; The Key To Success

With over 8,000 coins in the market now, spreading your investment in crypto is vital. Based on my research and personal experience thus far, my strategy is to keep 50% of the holdings in the top 5 stable projects. Currently, this position is held by Bitcoin, Ethereum, Cardano, Polkadot and the Binance Coin respectively. Personally I don’t own any Bitcoin, and my number one holding at present is Ethereum. I only started investing in crypto following the Bitcoin explosion last year, and therefore, my investment isn’t large enough to own a substantial part of Bitcoin due to the ongoing bull run. Considered the “Gold” of the crypto world, BTC has been growing steadily, and strongly held its position.

The next 20% should be in DeFi projects. Decentralised Finance (DeFi) are financial applications that run on Blockchain technology. As these projects use the concepts of the traditional banking system, they are highly liquid and stable. Though the DeFi hype began in 2020, 2021 will be the best time to select and invest in a few leading players in the industry who have remained strong thus far.

The Top 6 DeFi projects at present are:

NFTs make up the next 20%. My previous article on Non Fungible Tokens gives an overall explanation on the hottest Blockchain trend in 2021. NFTs have surpassed DeFi by exponential growth this year. The latest projects in the NFT space are Chiliz (CHZ), Ethernity (ERN), Ecomi (OMI) and Polkaman (PMON). I have invested in Ethernity, as the project is signing up some key talent in the sports industry. The price of ERN has seen an explosion since it was launched in the beginning of this month. Polkamon (PMON) is the new kid on the block in the NFT space, and with the on-going NFT hype, could prove to be a much anticipated “moon shot”.

ERN growth since launch – source CoinMarketCap

The balance 10% can be spread between assets that you can swap and make a few short term gains. Just make sure to add VeCHAIN to your mix. A high performer in the blockchain space, VeChain is used as a tracker, mostly in supply-chain logistics. They have also built a good customer base in varied industries. It’s not DeFI, nor a chain for minting NFTs, and yet, can perform in the same capacity.

The key to holding a good portfolio is to be open to shifting your assets in order to make gains based on the market trends. You can even have a long term goal of owning Bitcoin, however, if you are entering the market with a small investment, it will not give you a substantial gain in the short term. Investing a few thousand in AltCoins can help you pump your holding to own Bitcoins in the future. My personal goal is to increase my Ethereum holding, and so I count my total holdings in Ethereum value. Though if ETH continues to lag in performance as it has done over the last couple of months, I may need to convert it to other projects, and revisit ETH in the longterm.

Sources

https://cryptodaily.co.uk/2021/03/terra-virtua-and-ethernity-chain

https://www.lookintobitcoin.com/charts/stock-to-flow-model/

https://bitboycrypto.com

https://www.coindesk.com/defi-nft-projects

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