How to diversify your crypto portfolio and manage risk

Explore altcoins and stablecoins, invest in alternate products and spread investments across platforms

Market leaders Bitcoin and Ethereum are up by 86 per cent and 61 per cent, respectively, so far this year. AP
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Cryptos are back with a bang in this year’s trade. Market leaders Bitcoin and Ethereum are up by 86 per cent and 61 per cent so far this year, while other significant names, including Ripple and Cardano, are also trending up.

With the increased momentum being seen in these names, markets are worried that the investor population may get more complacent like in April 2021.

Last time, markets witnessed the “fear of missing out” phenomenon, in which investors entered unthinkingly on any significant technical breakouts in the crypto pairs.

This happened when critical levels like Bitcoin broke above $32,000 in late December 2020, or when Ethereum broke above $2,000 in April 2021.

While the jury is still out on whether we are back on the verge of another speculative panic-buying wave, investors are increasingly considering diversifying their overall crypto portfolio concentration risk.

The horror of seeing a complete portfolio wiped out within a few hours still haunts the memory of investors.

Amid this backdrop, it has become essential to diversify and maintain an overall disciplined approach towards crypto investing.

Here, we look at a few options to manage the risk against a significant crypto market downfall.

Avoid concentration risk

Look beyond Bitcoin and explore coins with multiple use cases.

Today, the crypto market is subject to thousands and thousands of individual coins and trading pairs. These belong to several sectors, including blockchain, Web3, Metaverse, non-fungible tokens, De-Fi, payment processing and core blockchain frameworks.

The crypto markets are also notorious for illegal and scam tokens.

Traditionally, while Bitcoin led the overall trading activity, today, the market has a number of alt-coins leading overall activity in their space.

Like other markets, the crypto market is subject to rotation and changes. For this reason, investors are better off allocating some part of the portfolio to well-established alt-coins.

What happened to the Bitcoin price, is it the end of the crypto boom?

What happened to the Bitcoin price, is it the end of the crypto boom?

A word of caution – sound research should be done before investing significantly in new names.

Diversification to multiple coins also reduces the risk of overexposing in just one blockchain system. For instance, in last year’s Binance blockchain hack, about $600 million was stolen.

Maintain exposure in stablecoins

Stablecoins are cryptocurrencies whose value is pegged to an individual currency or commodity.

Currently, the top market cap stablecoins peg their value to $1. The fixed peg value allows for the avoidance of any significant price distortions in a market crash.

Investors have used stablecoins to park their booked investments and trading profits in their portfolios. This ensures that the funds are available on demand.

The hassle of again converting money back from fiat to crypto is avoided. Tether and USD Coin lead the overall stablecoin market share.

The overall blockchain functioning makes stablecoin-based transactions cheaper and faster, especially for considerably large value flows.

Add exposures in the top US equity mega-cap names

Cryptos, owing to their product profile, often move in tandem with the moves in prominent US tech names.

Investors can therefore ride on the overall bullish wave in tech and crypto by maintaining exposure across both asset classes.

Investors can also look to add exposure in the top US tech names. Investing in big names like Apple, Facebook, Amazon and Alphabet ensures that the investor is also part of the overall equity growth story.

Invest in crypto trackers and alternatives

Instead of having exposure in a single large-value coin, investors can look to invest in alternate products like crypto exchange-traded funds and exchange-traded products as well as mining stocks.

Most of these products are priced lower compared to their large price-value traded coins – for example, most of the top crypto mining stocks trade below or near the $10 level.

Investors can invest in crypto-specific or blockchain sub-sector-related ETFs. ETPs are a prevalent investment vehicle in Europe.

Spread investments across platforms and exchanges

Crypto market trading is heavily skewed in favour of two to three big monopolies. Binance, the largest US exchange, controls more than 60 per cent of the daily trading volume.

Investors are better off owning their holdings across several platforms to play it safe during exchange or platform-specific events.

This is more critical as there is a lack of regulatory oversight and a proper framework for recovery mechanisms in the crypto trading domain.

Regularly monitor and rebalance the portfolio

Even if the end purpose is for long-term holdings, investors must regularly monitor and check for running portfolio profit and losses.

This ensures that investors know what’s happening with their holdings and any functional requirement to rebalance them.

Investors also need to book profits on a timely basis. The past crashes in crypto markets have very well exposed the dangers of not acting quickly.

There needs to be a balanced approach to being aggressive, while at the same time staying defensive against any significant market drop.

Vijay Valecha is chief investment officer at Century Financial

Updated: July 12, 2023, 4:00 AM