Crypto diversification

What is diversification?

Diversification is a measure to mitigate risk in a portfolio that usually combines a variety of unrelated investments. This is an attempt to limit any “overexposure” to any single asset or risk.

Is crypto diversification necessary?

Depending on your investment objectives, here’s why it may be suitable for your portfolio:

  • It is a good shield against unexpected market movements – positive and negative.
  • It is a good hedge against any single cryptocurrency stake. 
  • It allows the opportunity to capture well-performing coins simultaneously.

Keeping in mind that it’s also possible for all assets to increase in value or all assets to decrease in value, the point of diversification is to avoid a disproportionate reduction in returns across the board. 

The positive performance of some investments can minimise the negative performance of others in a portfolio. So owning a variety of assets means that when some lose value, others may gain value. 

Asset correlation

Traditionally, the benefits of diversification come from uncorrelated assets in a portfolio that respond differently to one another to market influences. With all cryptocurrencies being generally grouped under the same asset class, there are categories within the sector that offer different functions which can be somewhat deemed as uncorrelated.

It’s important to note that there should be a good understanding of multiple blockchain applications before conducting a portfolio. Here are some different cryptocurrencies and their use cases:

  • BTC – Store of value 
  • ETH – Smart contracts platform
  • XRP – Payment
  • AAVE – DeFi
  • USDC – Stablecoin

AutoBasket on Independent Reserve

The AutoBasket strategy is similar to the AutoBuy strategy, but instead of buying a specified currency, the AutoBasket strategy will buy multiple currencies weighing them against the market capitalisation of each currency. 

Example AutoBasket Portfolio

For example, if you deposit $100 and the current weightings roughly BTC: 65%, ETH: 30%, XRP: 5%, then an AutoBasket strategy will buy you $65 worth of BTC, $30 worth of ETH, and $5 worth of XRP. Autobasket will execute the grouped order upon each fiat deposit and will automatically re-weigh the underlying assets every week.