Crypt trading has become a big thing within the last ten years, with both veteran investors and newbies getting into the game. Interestingly, the number of crypto users has massively gone up from a little over five million users in 2016 to over 650 million users in July 2024. Actually, crypto adoption became even more massive when top global companies like Tesla and Mastercard announced their interest.
Now, the number of cryptocurrencies has also been increasing even as the number of investors go up. For example, Statista reports that there are 10,567 cryptocurrencies as of January 2025, a massive rise from just 66 cryptos in 2013. In short, this market is just growing bigger as the years go by. The prices of these tokens have also been changing, some negatively, some positively, indicating the volatility of these tokens.
Bitcoin, for instance, the mother of all crypto, has been making strides in the last few months, having passed the $100,000 mark on the 4th of December 2024. This just shows how much potential crypto carries. You can follow the Live Bitcoin price if you are a crypto enthusiast in order to know how it can impact your investment.
But the biggest question here remains, is it a good idea to invest in crypto? And if it is a good idea, should you diversify your portfolio or stick to one token? This article will be giving a clear direction for those who are thinking this way.
What is crypto portfolio diversification?
But before we can even get to the meat of it, let's first break down what diversification of crypto is. And by the way, you should know that not all tokens are the same, and you can't just replace one token for another. Here are some distinct sectors of cryptocurrency:
- DeFi: Used for bootstrapping liquidity into the protocol and distributing governance rights. Examples include Uniswap and Compound.
- Store of value: A class of monetary assets used to facilitate buying powers. Examples include Bitcoin and Litecoin.
- Smart contract platforms: These are incentives for node management. Examples include Ethereum and Solana.
- Stablecoins: Tokens that represent the price of the asset they represent. These include USDC, BUSD, and DAI.
- CEXs: Primary source for price data for oracles. Examples include KuCoin and MEXC.
Looking at these different categories, it is safe to say that if you are a crypto nerd, then you ought to have a whole portfolio of different categories of crypto. The goal is to have a majority of the classes of crypto in your portfolio so that you can capitalize on the rise in demand for either of them.
Now, let's see the importance of diversification.
Risk mitigation
One of the most common themes among cryptocurrencies is volatility. Today, the price of a token might be very low, and within less than 24 hours, the price blows through the roof and vice versa. For example, coins like DIONE have had a volatility of up to 1,087.19% in one month. How crazy. Considering that this asset class is still fairly new to the market, rapid changes in price are inevitable. For that matter, you need to diversify your coins to ensure that one massive change in a class does not ruin you.
For example, you can look at the following portfolio. 45% Ethereum, 15% Aave, 5% Uniswap, 5% Curve, 20% Polygon and 10% MakerDAO. When you look at this portfolio in passing, you might think that it is well-diversified. However, most of these tokens, apart from Polygon, are closely related to the Ethereum blockchain. The portfolio is, therefore, susceptible to any risks that might hit the Ethereum blockchain. However, if you have a portfolio consisting of Bitcoin, Ethereum, Cardano, Polygon and USDC, then the risks of one do not affect the other coins.
For you to have a well diversified portfolio, look at the blockchain it runs on and the class it is in. Good research will help you have a good one.
Exposure to different technologies and use cases
As we mentioned above, different tokens operate under different classes and technologies. Actually, not all coins can do exactly what the other can do.
Let's take the two biggest tokens, Bitcoin and Ethereum. Despite Bitcoin having a lower coin supply and being more liquid, Ethereum has better technology and more uses. While Bitcoin functions as a store of value, Ethereum is functional, catering to the execution of applications and smart contracts. Now, it would be unwise to say that Bitcoin is better than Ethereum, considering the price of Bitcoin is almost 30x the price of Ethereum. The wisest thing to do is to have both tokens in your portfolio and harness their advantages.
There are different technologies that operate under blockchain technologies including NFTs, DeFi platforms, supply chain solutions, among many others. These allow for the growth of various segments in the crypto market enhancing the notion that diversification is the best option you can have for your crypto portfolio.
Higher returns potential
This is a no-brainer. Considering that one token might be doing better than another at a particular time is reason enough to have a diverse portfolio. For example, within the first week of January, tokens like Access, Bitget Token, Assemble AI, Augir and Powerledger have been on the rise. During the same week, tokens like Aleo, Moo Deng, Degen, Athena and Moonwell have been losing.
If you have some of the gaining tokens in your portfolio, you'd be reaping their profits which might cover for the losing tokens. Compared to just having one token, there are chances of potentially higher gains when you have a number of tokens in your portfolio.
How to diversify
Just before we wrap up, someone would be questioning: what is the best way to diversify your investments? The answer is that this is not so hard to do. By doing some bit of research, you can make various classifications of crypto. An easy way would be to categorize crypto according to:
- Type of coin: These are the different classes of crypto including payment, security, utility, governance, gaming, and basic attention tokens.
- Industry focus: Here, you diversify according to the focus of various industries. Industries like healthcare, supply chain, transport, entertainment and real estate have been disrupted in a big way because of crypto.
- Asset class: These include bonds, stocks and even real estate.
- Investment vehicle: If security is an issue for you, then you can diversify crypto across various account types including digital wallets, cryptocurrency IRA or DeFi products.
Wrapping up
Indeed, we can really argue that diversification is an important factor for enthusiasts in a bid to manage risks and improve their ROI. It is therefore important that you do some intensive research before you can jump into this market.
