Cryptocurrency Investing - The Art Of Diversification

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10 Sept 2024

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Establishing Process & Execution
Execution is an important aspect of success. Simply taking part in the world of Cryptocurrencies will not ensure profitability. How you choose to go about it will however make all the difference. I have noticed that some readers seem to think I am here to enrich them. However, my writings are aimed at helping investors to become independent and powerful decision makers, and hopefully, good investment decisions.
When I share my viewpoints, interpretations, and understandings, it is to help deepen, polish, and fine-tune the skillsets and ideologies of investors. Yes, I will often drop an altcoin gem. However, if that is your main motivation, you are missing the point. Throwing you a fish is a short-lived benefit. However, becoming a skillful angler has a lifetime of benefits. Diversification and the effective application of this practice are enormously beneficial.
As with anything, one has to be wary of overdoing it, and the art of diversification is the same. Over-diversifying can eventually lead to spreading your capital too thinly, and ultimately, underperforming. Many investors will sit down and structure a portfolio, in terms of the coins and tokens they are looking to hold. However, effective portfolio construction has to involve the structuring process.
I can present two portfolios, identical in terms of the holdings. However, unique in terms of allocation. It’s not always about which coins you choose to hold, but how capital is deployed amongst these coins. The ROI can be significantly higher than the other, and this comes down to the finer aspects of diversification. Risk management incorporates diversification, which in turn incorporates capital deployment practices.
Many tend to think and operate in a rather one-dimensional fashion, and so tend to view these three practices as isolated, as opposed to inclusive.

Risk management
Diversification
Capital deployment

The truth, however, is that when you practice any of these three disciplines correctly, you will be unable to exercise them in isolation from each other. They are unified in a type of “marriage” and cannot be separated, if, of course, you wish to practice them effectively. Diversification extends beyond simply spreading your investment capital. Numerous factors need to be taken into consideration.
Understanding market caps, potential upside, risk/reward ratios, effective capital deployment, and relativity ratios all need to be taken into consideration and are foundational in establishing and executing effective diversification strategies. There needs to be a deep understanding, and not just simply spreading your capital over multiple assets. A lot of new investors think they can simply read a few blog posts and watch a few YouTube videos and that’s it.
People underestimate the requirements and fall into a delusional state, all thanks to a bull market. Everyone’s a genius in a bull market. Simply go wild and you are likely to see your portfolio rise in value. However, a successful investor will be applying principles with one main objective in mind: To outperform the altcoin index or the overall Cryptocurrency market cap growth throughout the bull market.

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You need to achieve this outcome to perform as an investor. Not only that but an investor who manages to understand and apply the correct disciplines can outperform these benchmarks rather significantly. However, once again, it all comes down to time, dedication, and research. You know that thing (DYOR) every Crypto investor seems to promote but seldom practice?

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Final Thoughts
Generally speaking, a lot more thought needs to go into the average Crypto investor’s portfolio construction. In many cases, what eventually becomes a portfolio was never predefined or constructed. It is simply the accumulative result of random purchases with little to no planning. Understanding these dynamics, as well as practicing them can have a significant effect on your portfolio and what it can become, in time.

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It can mean the difference between being modestly profitable and overwhelmingly profitable. It’s a good time for investors to get serious about their portfolios and strategies. Laying a firm foundation for the bull market ahead is vital, and can later prove to be an immensely powerful decision. All the best on your Crypto journey, keep it real, and I will see you in the next one!

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Disclaimer
First of all, I am not a financial advisor. All information provided on this website is strictly my own opinion and not financial advice. I do make use of affiliate links. Purchasing or interacting with any third-party company could result in me receiving a commission. In some instances, utilizing an affiliate link can also result in a bonus or discount.
This article was first published on Sapphire Crypto.