Avoid keeping all your eggs in one basket! That is a common piece of advice from both wise grandmothers and experienced traders. The suggestion is sound and for a good reason. 

The finest investors seek a variety of top-notch prospects rather than depending solely on one investment. Single crypto is just one of many currencies included in a wholesome investing portfolio, just as eggs are one of several significant food categories. So, let’s explore how you can diversify your crypto portfolio and make it more profitable.

Before we move on to “how,” let’s see “why?”

Why should you diversify your portfolio?

Diversification is a strategic approach that disperses your investments across various asset types. You allocate small percentages to multiple projects rather than concentrating solely on one crypto. By assigning specific percentages to distinct assets within your overall portfolio, you effectively mitigate risk and reduce volatility, enhancing the stability of your investment portfolio.

Consider this scenario: if you heavily invest in Cardano, anticipating it to outshine Ethereum, but the Cardano price experiences a steep decline, your entire portfolio’s value will mirror this downturn. In simple words, diversifying your portfolio safeguards against the possibility of losing your entire investment value in the event of a single investment’s devaluation.

Pooling all your crypto assets into a single project exposes you to the potential consequences of singular events, whether it’s a market crash, a crypto winter, or even an unforeseen malware attack targeting cryptos. On the contrary, spreading your investments across various coins and tokens reduces your vulnerability to adverse news events or market slumps, enabling you to navigate challenges and maintain portfolio growth.

6 ways to diversify your portfolio & make it profitable

#1 Buy cryptos with varied use cases.

To enhance the diversification of your crypto holdings, consider investing in cryptos with various use cases. While cryptos primarily serve as a medium of exchange, their utility extends beyond simple transactions for goods and services.

For example, Bitcoin transcends its role as a transactional currency; it also functions as a store of value, offering opportunities for wealth preservation and growth, as evidenced by its history of delivering substantial returns to investors. Another option, Ethereum, the second-largest crypto project globally, introduces smart-contract functionality, enabling the creation of digital programs. Investing in Ethereum means participating in a blockchain network that supports the development of Decentralized Applications (dApps).

Another strategic allocation in a crypto portfolio involves stablecoins, whose value remains tethered to underlying assets, typically fiat currencies. Stablecoins like Tether (USDT) and USD Coin (USDC) maintain consistent values, serving as stabilizing factors within the often volatile crypto market.

#2 Diversify based on various crypto blockchains.

Blockchain technology underpins the functionality of cryptos, but its potential extends far beyond. Blockchain platforms are extensively in demand in numerous industries due to their innovative solutions.

Take the Ethereum blockchain, for example; it enables trustless agreements and facilitates Decentralized Applications (dApps) creation without intermediaries. In contrast, Cardano (ADA) is a competing blockchain that emphasizes security, scalability, and efficiency. EOS (EOS) blockchain differentiates itself based on web services, encompassing cloud storage, dApps, and smart contracts. Notably, EOS also has the capability to process millions of transactions per second and offers a streamlined process for upgrading and modifying dApps.

These examples merely scratch the surface of the diverse range of blockchain technologies driving the ever-evolving cryptocurrency industry. Diversifying your investments across these blockchain platforms can enhance your exposure to innovative solutions and potential growth in different sectors.

#3 Diversify better with market capitalization.

Bitcoin is the largest crypto for market capitalization, with approximately $505 billion. Bitcoin may be the largest one, but the crypto market consists of many altcoins worth considering. Any crypto with a larger market cap may have stability and strong fundamentals, but one with a smaller market cap may have better growth potential.

For instance, take Kusama (KSM), a promising crypto with a market capitalization of roughly $153 million, offers a unique platform for developers to experiment with their Decentralized Applications (dApps) before deploying them on the Polkadot (DOT) network. Despite its comparatively smaller market cap, Kusama holds substantial potential for growth and innovation.

#4 Diversify crypto projects by geographical location.

Diversifying your crypto portfolio by considering projects from various global locations can broaden your exposure to a wide array of innovations in the crypto industry. It’s advisable to steer clear of crypto initiatives in regions where crypto faces prohibitions or restrictions and instead focus on locations that focus on growth and innovation.

For instance, Portugal is a crypto-friendly hub and a haven for tax-conscious crypto investors. El Salvador made major headlines by becoming the first nation to embrace Bitcoin as legal tender, with ambitious plans to establish a “Bitcoin City” free from taxes and fueled by crypto. In the United States, states like Texas, New York, and Georgia actively attempt to attract the crypto industry to their jurisdictions, emphasizing their commitment to crypto innovation.

#5 Try investing in a wide range of industries.

The crypto space offers investment opportunities spanning diverse industries. The finance sector is the primary adopter of cryptos, notably witnessed in the rise of Decentralized Finance, or DeFi, which allows individuals to engage in seamless digital transactions using a P2P network, eliminating the need for intermediaries like traditional banks. Beyond mere transactions, DeFi encompasses lending and investment activities within the cryptocurrency domain.

Furthermore, integrating cryptos into the gaming industry has gained substantial momentum. An increasing number of users are actively participating in the trading of virtual assets within a burgeoning global virtual marketplace.

#6 Diversify better based on risk level.

When crafting a diversified crypto portfolio, aligning your choices with your individual risk tolerance is smart. The fundamental principles governing asset allocation in traditional portfolios remain relevant.

To establish equilibrium within your crypto portfolio, consider investing a higher allocation towards more stable cryptos, like Bitcoin and Ethereum. Having endured the test of time, these cryptos often serve as foundational assets. To further manage portfolio risk, including stablecoins can be a strategic move.

Subsequently, you may allocate a smaller proportion to ventures associated with emerging cryptos, which inherently carry higher risk profiles but offer diverse use cases and growth potential.

Your allocation strategy across a select few or a broad spectrum of crypto investments can be adjusted to align with your specific risk appetite.

Bottomline thoughts

As you advance with your cryptocurrency journey, diversification is considered a smart investment strategy that enables you to reduce the chances of loss. You can maximize profit by conducting appropriate research before investing in any crypto project, even though the profit margin or returns may be reduced when you diversify among multiple currencies.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.