Over the past 30 days, I tried something new: buying $1 worth of cryptocurrency every night. It wasn’t much, but it gave me a unique perspective on crypto investing. I ended up purchasing 30 different cryptocurrencies, one each night. What surprised me was how much my portfolio's value fluctuated, especially as I kept adding more coins. I thought diversifying would protect me, but instead, I faced a lot of volatility. Here’s what I learned from this experience.
The Dangers of Over-Diversification
Initially, spreading my investments across many different coins seemed smart. Diversification is often recommended in investing. However, it didn’t work as well as I’d hoped. Some coins were relatively stable, while others swung wildly in value. Every time I added a new coin, my portfolio’s overall value seemed to dip.
Not all coins are created equal. Many of the ones I invested in were far from stable. Some had little to no movement, while others saw massive spikes or drops that impacted my overall performance. While diversification works in traditional investments, the crypto market is different. Volatility can erase the benefits of diversification, especially if you’re mixing stablecoins with highly speculative assets.
The Three Portfolios Strategy
From this experiment, I realized a more structured approach might have worked better. Instead of blindly diversifying across 30 different coins, I could have built three separate portfolios, each serving a specific purpose:
Stable Portfolio: Consists of stablecoins like USDT, USDC, or DAI. These coins are pegged to fiat currencies, meaning their value doesn’t fluctuate wildly. The goal here is stability and preserving value over time.
High-Risk, High-Reward Portfolio: For the risk-takers, focusing on coins with high growth potential but also a lot of volatility. These coins can go through huge price swings. While some may not be stable, they offer the chance for big returns when they go up.
Balanced Portfolio: A mix of both stablecoins and more volatile assets. This helps manage risk while still giving you the potential for growth. By mixing stablecoins with higher-risk coins, you can balance out some of the wild price swings while also positioning yourself to benefit from any potential market upswings.
Understanding Risk Management in Crypto
When it comes to investing, risk management is crucial. It’s not just about how much you invest, but how you spread your risk across different assets. In my crypto experiment, I learned that each coin carries its own level of risk, and that level of risk can change over time.
Risk Management Equation:
Risk = (Potential Volatility) x (Amount Invested)
Potential volatility refers to how much a coin’s price can move up or down in a given time. The amount invested is the capital you’ve allocated to a particular asset. The more volatile a coin is, the higher the risk. This is why balancing your portfolio with both stablecoins and speculative assets can help mitigate some of the risks while maximizing potential returns.
A Smarter Way to Invest in Crypto
Looking back at my 30-day crypto journey, I now see the importance of creating a diversified, but more structured portfolio. By having three distinct portfolios based on risk and stability, I could’ve managed my investments more effectively.
As an investor, it’s important to understand the coins you're investing in, not just the amount of money you're putting in. The best strategy involves balancing your risk across different types of coins and staying informed about market conditions.
Question:
If you're curious about which coins I invested in during these 30 days, or which stablecoins I think are the best for a low-risk portfolio, let me know in the comments below!
