Is It Worth Diversifying Your Portfolio Outside of Bitcoin and Ethereum?
Around this time one year ago, the Progressive Investor inside both you and I was experiencing jubilation as the greatest bull run in the young history of cryptocurrencies started taking off. It all started with Bitcoin, and now there’s no question that Ethereum is stealing the show.
Given the frenzy that we are living through, it makes sense that many believe once Bitcoin and Ethereum end their respective bull runs, capital will flow into altcoins like we’ve never seen before.
This begs the question: is it really worth diversifying your portfolio and going beyond Bitcoin and Ethereum?
The reality is the answer to that question really is a personal one. The classic answer in the investing world as to whether or not you should (or shouldn’t) do something is that it all comes down to your risk tolerance.
I’ll talk about that in detail in this post, but I also think it’s important to consider things like opportunity cost and the odds of picking a project that is going to outperform either Bitcoin or Ethereum in either the short-term or the long term.
Let’s go over all of that and more in this week’s edition of Netcoins Progressive Investor.
How Are You Going to Diversify Your Portfolio Beyond Bitcoin and Ethereum?
If you’re reading this, I’m assuming you probably already own some Bitcoin or Ethereum and perhaps a small cap crypto project is catching your eye.
You’re doing your due diligence and you’re ready to jump in and benefit from the monstrous gains your favourite Youtube influencers keep talking about. You might even be adding to a position in what you believe will be the next 100x opportunity.
Either way, I’m making these assumptions to point out a very important question worth answering. How exactly are you going to go about diversifying your portfolio?
In the traditional financial world, a financial advisor can take you through a risk tolerance questionnaire to decide whether your own personal tolerance is high or low.
You can also take matters into your own hands and gain exposure to cryptocurrencies through traditional investing instruments like stocks or exchange traded funds.
The thing with that is most altcoins aren’t included in crypto ETFs or stocks at the moment. Many of those instruments are only tied to Bitcoin and Ethereum, and even the instruments that offer exposure beyond that are limited to the top 20 cryptos.
That brings me to my next point.
The Value of Cryptocurrencies and Their Market Capitalizations
At the time of this writing, the market capitalization of every cryptocurrency combined is over $3 trillion Canadian. That’s an astounding figure considering that a year ago, seeing Bitcoin eclipse $1 trillion American was still just a dream.
Here’s the thing about the market capitalizations of cryptocurrency projects: Even though the value of the world’s top projects is growing exponentially, most of the capital is still just in the top 20 projects. Consider that Bitcoin and Ethereum combined are worth $1.95 trillion Canadian. That valuation represents 65% of all of the money currently invested in cryptocurrency projects.
The next two most valuable crypto projects are Binance Coin and XRP. The total market cap of those two projects is a measly $215 billion. Both are certainly proving to have valuable use cases within cryptocurrency, but remember, they are also both run by centralized entities and are thus not as attractive to crypto purists.
Combining all of those numbers together reveals that 72% of all the money in cryptocurrency is in the top four projects.
Most Altcoins are like Penny Stocks
Think about this. What are the odds that you’re going to pick the next big project to crack the top five, the top 10, the top 20, or even just the top 50 cryptocurrency projects by market capitalization?
While you’re thinking about your answer, keep in mind that at the time of this writing the 50th most valuable project in cryptocurrency is a DeFi project called Compound Finance that’s valued at $4.9 billion Canadian.
If all cryptocurrencies were publicly traded companies trading on the stock market, a $4.9 billion valuation would still be considered a relatively small company in most industries.
In that sense, investing in altcoins is almost like taking a chance on a penny stock. Even if it’s in the top 50 cryptos by market cap.
Picking a 100x Crypto Project Is like Picking a Needle Out of a Haystack
95% of crypto projects trading in the top 200 according to market capitalization probably aren’t going to change the world, and they likely won’t make you rich before people lose interest.
Don’t think that’s true? Take look at a screenshot of the last time the crypto market experienced a wild bull run. I’m talking about 2017. At the time, even a brand-new crypto investor could pour money into initial coin offering and see their gains 100x in a month or less.
And yet, most of the projects offering those gains four years ago are no longer around. It’s easy to get excited at the thought of picking a 100x crypto project, but very few investors talk openly about being on the other side of that and losing all their money.
The reality is that most of the projects with 100x potential right now are going to see many investors be left behind as bag holders.
That’s why I recommend subscribing to a saying by a certain celebrity investor that actually doesn’t believe in cryptocurrency. His name is Warren Buffett. Warren Buffett believes there are two rules to investing:
- Don’t lose money.
- Don’t forget rule number one.
While it’s certainly appealing to daydream about getting rich quick and being one of the investors fortunate enough to invest in a 100x project, remember to think the way a billionaire does. Don’t invest in crypto projects that you think are going to make you rich. Instead, invest in projects that you think are less likely to lose your capital.
The Best Way to Diversify Your Crypto Investments
With so many projects open for receiving your crypto investing capital, you have to find a way to navigate your way through all of the noise.
My first suggestion is to become an expert in at specific category of crypto investments that you really enjoy and that you really think will impact the future (even if you can’t narrow it down to one specific project within that niche).
If you really understand the value of digital real estate and metaverses, conduct due diligence comparing those projects to one another and then make a decision from there as to how you will invest. If you’re really into smart contract platforms that are chasing Ethereum, focus on that. If you have an eye for rare collectibles, become a curator of the coolest ones.
Whatever your muse is, become an expert in that niche.
Why You Should Consider Becoming an Expert in a Specific Crypto Sector
Becoming an expert in a specific sector of crypto investing will stop you from chasing green numbers all over your computer screen. Secondly, you’ll begin to understand how to spot fundamental value and not just price.
It isn’t realistic for the average crypto investor to be aware of what’s happening in 20 different categories of crypto investing all at the same time. That’s overwhelming!
You’ll begin to learn about the investment value of brand names too. If there is a brand name that you really trust, odds are other people trust it too.
That’s exactly what’s happening with Ethereum right now. Yes, the excitement surrounding its price appreciation is based on a potential upgrade next year that will allow transactions to move faster and at a cheaper price. But Ethereum is more than just a gateway to DeFi or a fast smart contract platform. It’s now a brand name that popular culture knows.
Other cryptocurrencies like Cardano and PolkaDot are very exciting in the area of smart contracts too, but they won’t become popular brand names for quite some time, even if they eventually scale faster than Ethereum.
The Easiest Way to Start Diversifying Your Crypto Holdings
Ultimately, diversifying your cryptocurrency holdings comes down to doing your own due diligence, understanding your own risk tolerance, and having a plan for allocating assets in a way that makes you feel comfortable whether your investments are moving up or down at any given moment.
The best way to diversify your crypto holdings is to take calculated risks and only invest what you’re willing to lose. Those ideas may be clichés but even with Ethereum exploding right now, it’s important to remember that bull runs do eventually cool off, and a pullback is actually a good sign for the crypto market. It means the market is healthy.
Nevertheless, if you’re ready to diversify your holdings beyond Bitcoin and Ethereum, you can move into other projects by registering for a free account at Netcoins.
Netcoins is one of the most trusted cryptocurrency exchanges in Canada. It’s based out of Vancouver and outside of allowing you to purchase Bitcoin and Ethereum, you can also get your hands on Litecoin, and Canada’s first stablecoin, QCAD.
Start diversifying your holdings today!
Writer, content marketing at Netcoins.