by Wayne Walker
Serious investors are usually on board with the idea that diversity is desirable in a portfolio. Whether one is trading typically secure government bonds or volatile cryptocurrencies, diversity is one thing we can all agree on. This is especially true when it is common knowledge that roughly 1,000 persons own 40 percent of the Bitcoin market, the so-called Bitcoin Whales. The whales, by the way, are in other coins as well.
What I will do is expand on the concept and share more of the strategies that high-net-worth crypto investors use with their portfolios. As I have covered in previous articles, you should aim to have a portfolio with a mix of cryptos to avoid the madness of having all your money in Bitcoin or Ethereum. To first step to noticeable increase your diversification is to diversify by sector, as in the feature, and or main purpose of the coin.
Crypto diversity by sector
Some of the sectors to begin with: Tokens, Conventional, Smart Contracts, Settlement Networks, Privacy, Overlay Service. The suggestions below are just that, suggestions, obviously not a complete list of every coin from every sector. The list, however, is a good starting point when assembling your portfolio.
The sectors and possible coins
Token: Stratus, EOS
Smart Contracts: NEO, Ethereum, Cardano
Privacy: Monero, Dash, Zcoin
Conventional: Litecoin, IOTA, NEM
Settlement Networks: Stellar, Ripple, Tether
Crypto diversity by exchanges
Diversity of exchanges is often overlooked in the risk management process. This oversight was especially painful in 2017 when several of the most well-known exchanges in the East and West had issues dealing with the market rush. These issues took the form of servers being overloaded, sites going down and, for many, the most painful was being unable to remove profits. This is a 24/7 market and major moves can come at any time, therefore the ability to execute is paramount. You begin the process by carefully selecting according to a mix of factors including: are they regulated or not, which country, what is the speed of bank transfers, how is their market reputation, etc.
Extending the head start
Just by incorporating the above steps you will have a clear head-start on many investors. To extend your head start, the next step is to consider the weight of each sector or coin in your portfolio. For example, if you have 4 coins in a sector do they each get 25% allocation of your funds, or if 4 sectors, do they each receive 25%? The final composition takes into account many factors, for example, your risk tolerance, your exposure to other asset classes, the size of your account. These are some of the things that I work on with clients to help them have peace of mind.
You then continue the process by seeing what percentage of funds are with each exchange. The crypto market still remains mostly unregulated, if your exchange goes bust there is very little help to get from any government, therefore being aware of what percentage of funds are sitting with each exchange is a necessary part of your risk management.
Before diving in, first on your list is getting some practical education. This can be an online class, books, or simply speaking with a trusted advisor. I will caution about using some of the online crypto forums. Most are without any sort of real supervision. Just a scan of several of the large ones available on the main social networks and the answers provided to some of the questions from members are absolutely scary.
The past few months have shaken the confidence of many about the crypto markets, especially those who bought in December to only see their accounts implode. I have met a few in class and I will share with you what I told them: if you’re in for the long term, take a deep breath and let things play themselves out. A lot of what we are seeing has been seen before in the crypto markets (I also share the charts that explain this). Happy trading!