One of the most touted investing strategies in the investing world is the idea of diversification. For those not familiar with the concept, diversification is the act of spreading out your investments to
protect yourself against unforeseen market movements but also allows you to capture multiple growth opportunities.
Let us say we have an investor named Tom. Tom invests all his money in Tesla. The following week Tesla drops from $700 to $200, at this point Tom is significantly in the red and if he sells, he will lose most of the money he invested. If Tom is simply very bullish on the EV sector, he should
have invested his money across multiple solid EV players like Lucid and Nio to protect himself from one company underperforming. Additionally, there is also sector diversification i.e., Tom should invest outside of EV as well to protect himself from the EV sector unexpectedly tanking.
Now let us say we have an investor named Sarah. Sarah invests all her money into Electric vehicles, during the period of a year the EV sector goes up 15% but in contrast smart phone companies averaged a 100% return and e-commerce giants like Amazon and Shopify had 85% returns. If Sarah
had diversified her portfolio, she could have captured the movements from all these sectors instead of capturing a small movement of just one. Now, you can counter this by saying if she put all her money in smart-phone companies she would of saw the biggest returns. Although this would be true for this example, it is impossible to be certain that a particular industry will be the biggest mover as well as banking all your chips on one sector moving up exposes you to the risk outlined in example one.
The main idea of diversification is to not put all your eggs in one basket. By spreading out your investments you can minimize your risk in investing and take advantage of the multiple opportunities that exist within the market. This is common knowledge for those investing in the stock market,
but I am not seeing a ton of diversification in the crypto world. This post will outline how you can diversify your portfolio in the crypto market, to take advantage of the individual sectors and minimize your risk.
Defi is, in a lot of ways, society’s answer to the 2008 financial crisis. The great recession showed a lot of us that our money cannot be trusted in the hands of corrupt banks and government and that the world of decentralization, especially decentralized finance is much needed. Defi is one of the sectors you should keep your eye on for 2021 and the years to follow. It has a promise of revolutionizing the way we do finances; this will be subtle changes in first world countries but elsewhere in the world this will create enormous wealth for the countries involved and for those who have invested.
Watchlist: Chainlink(LINK), Maker(MKR), Polkadot(DOT), Uniswap(UNI)
NFTs or non-fungible tokens are digital collectibles using blockchain technology to verify their individuality. NFTs will shape art distribution, VR, gaming, and collecting in the decades to come. Diversify through NFTs is a great way to invest in the crypto space without having any money tied to specific tokens or crypto eco systems. Even if the NFT you buy does not end up being profitable, it’s still cool to be a pioneer!
My post on the importance of NFTs is here
Watchlist: Check out NiftyGateway
Exchange Based Tokens
These are probably the most undervalued tokens now despite Binance token’s huge growth as of late. The NYSE was launched in 1792, at the time you could have invested in the hot stocks at the time but imagine fi you had the ability to invest in the exchange itself and capture some of the value accrued through all the investing and trading. This is not a direct comparison, but the point remains. As the crypto space grows, exchange with utility-based tokens will explode in value and rupture other crypto eco systems like Ethereum which is being hindered by its incredible has fees.
Watchlist: Binance, BigONE , Voyager, UniSwap
Economic Based Tokens
This isn’t a common term but one I came up with based on the value I see some of the cryptos creating. Projects like Cardano are looking to enter emerging economies like Africa and enable large populations to prosper. This is a huge opportunity being overlooked in the crypto space. Fortune 500 companies have been trying to enter emerging markets like Africa for decades now but have not been able to easily due to the lack of financial infrastructure that exists within these economies. Solving these issues and then partnering up with largest companies in the world, is a huge opportunity and investing now can potentially lead to astronomical gains in the next 5-10 years.
You can find my analysis of Cardano here:
Watchlist: Cardano is the main one I see right now to be executing this well but Ethereum, Maker and Enigma may be worth looking into as well.
Stores of Value
Crypto is revolutionizing all of finance, defi specifically is looking to revolutionize banking and the transfer of money. Bitcoin represents a store of value, a place to hold your money and to grow it while you are not doing anything with it. In this sense, Bitcoin represents the digital equivalent of investing in gold and will replace gold. The silver of the crypto space is debatable, but my best guess would be Litecoin. Litecoin is a more useful token compared to Bitcoin as it has partnered up with companies like Paypal to infiltrate current legacy payment system. Overall, the main point about this section is to pick assets that are outside the crypto sphere in a sense. Obviously, Bitcoin is still a crypto but its use within the crypto space isn’t utility based but more so as a store of value in a non sovereign asset that isn’t correlated to any governments or stock markets. Despite its volatility, Bticoin is one of the safer crypto investments as its adoption as a store of value by the masses and now corporations make it safer in the long run as it would be highly unlikely it goes to 0 at this point. In contrast, 99% of the altcoins will go to zero like the dotcom bubble, but the ones that survive will 100x at a minimum.
You can find my Analysis of Bitcoin here
Watchlist: Bitcoin and Litecoin
In the end, diversifying your portfolio is extremely important when it comes to investing, especially in a bubble market like crypto. Nobody truly knows which project is going to come out on top at the end of this. By diversifying your investments, you have a higher chance of picking the next Amazon or the next Google of the space, and in that case you’ve hit the jackpot.
As always, thanks for reading!