How to Minimize Risk in Your Crypto Portfolio

by James Lizowski about a year ago in bitcoin

Learn how to diversify with cryptocurrencies and minimize risk in your crypto portfolio.

How to Minimize Risk in Your Crypto Portfolio

Never putting all of your eggs in a single basket is good sense in many different parts of modern life, particularly in investing. This is why diversification is a common approach to any sort of investing. To minimize risk in your crypto profile means diversifying, but that is not as simple as it sounds. Though risk management in other areas of finance are relatively straightforward, experts rightly point out, "Technically, diversifying away risk in a crypto-only portfolio could be difficult." It's one of the things no one tells you about investing in crypto.

For one thing, proven channels are limited mostly (in the public eye) to Bitcoin and Ethereum, though that is rapidly changing. Digital currencies, while not yet the norm, are becoming more and more familiar and investing in cryptocurrencies, including the smart contracts of Ethereum and various ICOs or initial coin offerings are catching up with Bitcoin quickly. Though investing in an ICO is risky as well. Five minutes online, visiting social media, or reading headlines will prove that quickly enough.

Before we get too far ahead of ourselves, though, let's consider options and how they can be used to help investors of any level minimize risk in your crypto portfolios.

Diversify your investments in cryptocurrency.

Image courtesy Andre Francois

As mentioned, Bitcoin and Ethereum dominate, but a two asset portfolio is a foolish one at great risk for loss. As one expert wrote about this issue, "If two assets in the same portfolio move in the same direction, then gains in wealth will be greater and losses more severe." Thus, savvy investment means building a portfolio with negatively correlated options.

This is how and why there are substantial challenges when attempting to minimize risk. If the price of Bitcoin sharply declines, as an example, it is commonly believed that there are few other cryptocurrency assets (altcoins) that will not follow. Thus, it is a highly volatile method of investment to choose options correlated directly to the value of Bitcoin.

Yet, studies have shown that multi-crypto assets actually do not follow that pattern specifically. Instead, a savvy investor can research the options available and choose high and low risk options to create hedges and diversify. There are altcoins that are set to boom in 2018. This can minimize risk in your crypto portfolio measurably. As one expert has said of this method, "portfolio diversification gives you the opportunity to receive profit from the whole market growing and not depend just on having faith in one coin…. You can make different portfolios (for example, high-risk, average, low risk) and receive profit that will be “averaged” on risk type.”

How? It is not as complicated as many like to make it seem. Here is our simplified suggestion. First, overweighting in the known and proven entities such as Bitcoin and Ethereum is great. As the leading blockchain company in the cryptocurrency market, Bitcoin is slated to be a consistent earner, with deviations of no more than 168%. Ethereum is not the same, as it is only three years out and yet is steady enough to offer stability as your next best "sure thing."

Once you've weighted the portfolio with these options, you can then diversify among the altcoins in the current top 100 ratings (using their market cap to guide you) if you are more comfortable with a surer return. However, one expert discovered that he was able to minimize risk and profit higher when he chose to overweight smaller market cap coins. What this proved is actually not all that astonishing in the evolving world of cryptocurrencies.

"The newest and smallest coins have the greatest ability to grow, and 'cheap' coins have a lot of room to move up. If those coins are backed by solid teams addressing a real market problem (or if they’re manipulated by a small group of people continuously), then it’s not surprising that they can produce the biggest returns."

What this shows is that you can minimize risk in your crypto portfolio by using a venture capital approach over a classic stock or market investment approach. However, it would take research to uncover the ideal runners.

Beyond Coins

Image courtesy Mark Finn

Of course, as an investment vehicle, cryptocurrencies are never limited to the coins alone. There are also future contracts as an option for what one expert calls the "brave investors" who are eager to bet on Bitcoin while angling to minimize risk in their crypto portfolios. Trading volumes in both areas are high, and financial markets are showing a growing number of parties eager to offer more and more options for the derivatives market.

In 2017, the Chicago Board Options Exchange and the CME Group Exchange both made crypto futures a reality. Why the leap? Was it to give people like yourself a way to minimize risk in your crypto portfolio? No, it was done as a work around for investors tied of the slow transaction speeds of Bitcoin exchanges. As one said of this move, "the future can be traded on regulated markets, it will attract investors, making the market liquid, stabilizing prices, and… If prices stabilize, we may start seeing more companies accepting bitcoin as a mode of payment. This may further bring liquidity to the market."

So, you can easily remove all of your eggs from that one lone basket if you use some of the suggestions here. You can weight it with sure fire options like Ethereum and its smart contracts and Bitcoin with its wallets, and you can explore the altcoins to gauge which seem to be the most likely to give you higher returns. You can also look to the use of short or long term futures options in Bitcoin or crypto currencies and build hedges against loss.

It is never easy to find a way to diversify investments. This is true whether you are seeking way to maintain the growth and value of a traditional portfolio or minimize risk in your crypto portfolio. However, as the crypto world evolves, you have more and more opportunities and information that can steer you towards the wisest choices. It is unlikely that cryptocurrencies are going away in the near future, or even in the distant future, so they are a savvy choice. You now have some basic ways to safely dedicate some of your hard-earned money towards investing in them!

Read next: Best Performing Crypto Coins to Buy in 2018
James Lizowski

Spends his days making his own Star Wars figurines. His craft has driven him to look towards the future, drawing inspiration from past technological advances.

See all posts by James Lizowski