In a volatile and fast-changing market, diversification is one of the most important tools an investor has at their disposal. It refers to spreading the investments across different assets, different markets, and revenue streams so that there’s a backup in case one of them doesn’t pay off.
In this article, we’ll go over how a modern investor should diversify their assets, with a special focus on innovative assets, such as cryptos. These should be handled with a plan of their own, but they should be just a part of a broader investment portfolio.
How to Diversify Traditional Assets?
The traditional assets every investor should have need to be diversified as well. The principle behind this diversification can be boiled down to lowering risks, as that is the main point of the process:
- Stocks and bonds should be diversified between domestic and international stocks, as well as between stocks of companies from different industries and fields of work.
- Cash and equivalent need to be divided between those focusing on stability and those offering liquidity. That way, the investors can pull some of their assets when they need them.
- Real estate investments should include outright owning property and investing in real estate investment trusts.
- Commodities need to include gold, agricultural products, oil, and a variety of other assets.
How to Diversify Digital Assets and Cryptocurrencies
Now, when cryptos are widely accepted among the general public, and anyone can learn how to buy crypto with a debit card (from resources such as the one here), investors are incorporating cryptos into their portfolios. Cryptocurrencies need to be diversified to minimize risks as well.
Long Term Assets
Cryptos have proven that they can be used as long-term assets for investors to buy and hold. Even with all the dips and rises in the market, there are a few cryptocurrencies that have been rising steadily in the long term and that are best used to store value.
The most important of these include the two biggest cryptos out there – Bitcoin and Ethereum. Even portfolios that are focused on quick trades should at least include some of these.
Altcoins Focused on Utility
At least a portion of the cryptos in a portfolio should be the ones that have real-life utility due to their technical features. These are used to facilitate smart contracts and automate transactions. Many industries need these features to ensure safety and fairness in business dealings.
The most common and widely used such cryptocurrencies are Solana, Chainlink, Cardano, and Uniswap.
Stablecoins
Stablecoins are a unique asset type that has recently become popular among investors and should be included in the portfolio. Stablecoins are based on the value of fiat money, most likely the American dollar. Therefore, it can be used similarly to cryptocurrencies but is not as unstable and volatile as some of them.
For some users, including stablecoins in a crypto portfolio, defeats the whole purpose of having cryptos as assets not controlled by the government.
Tokenized Assets
Tokenized assets refer to tokenized ownership (or fractal ownership) of real-life assets. It’s a blend of traditional finance and the use of blockchain, which guarantees efficiency and transparency when sharing ownership of assets.
The most common assets to be tokenized are real estate, but the same can be done with stocks, commodities (such as gold or agricultural products), collectibles, fine art, and many others. It’s important to note that even among crypto assets, tokenized assets are a novelty, and including them in a portfolio comes with some regulatory uncertainty.
Portfolio Allocation
Not all assets we mentioned demand the same spot within a diversified portfolio. Some of these come with greater risk but provide more profits, while others are safer and are to be a part of a long-term strategy.
Blue chip cryptos should be somewhere between 30 and 50 percent of the crypto portfolio. These are the most stable and, therefore, the most important part of the portfolio.
Utility coins should be somewhere between 20 and 30 percent, depending on the other assets. Their role within the portfolio is to provide growth.
Stablecoins don’t need to be more than 25 percent of the portfolio and no less than 10 percent. They are most useful as a hedge against changing markets.
Tokenized assets are the most novel, and they should take up between five and ten percent.
To Sum Up
Modern investors need to incorporate crypto assets into their portfolios, as they are now a part of mainstream finance and can be profitable. These assets need to be diversified so that the risks are minimized, and investors can survive a downward turn in markets.
The assets should include safe cryptos with long-term value, cryptos that have applications in many industries, tokenized assets, and stablecoins. These assets should then be allocated so that the profits accumulate over time with plenty of room for growth.
