4 Best Strategies to Use Cryptocurrency to Diversify Your Investment Portfolio

If you are looking to combine everything with your traditional investment portfolio and want to bring stronger risk tolerance to your strategies, cryptocurrency can play that role. This speculative, highly volatile asset has brought investors both astonishing profits and catastrophic losses. Many cryptocurrencies often report losses of 50% or more within a few months, weeks, or even days, making some people millionaires while destroying the savings of others. Therefore, whether you are looking to build a diversified portfolio to help you achieve short-term financial goals or long-term retirement plans, putting all your money into one basket is usually not a good idea. Although even the most speculative investors do not recommend putting all your money into cryptocurrency, it can be used as a diversification tool for your overall investment portfolio. Regarding investment advice, when it comes to the volatility of the cryptocurrency market, you should proceed slowly and follow these strategies. Manage risks by allocating a small portion to cryptocurrency. If you're wondering how much is too much when investing in cryptocurrency, most financial advisors and experts in the field recommend that the cryptocurrency allocation be between 1% and 5%, with very few recommending an allocation of more than 10%. Simply put, don't invest more than 10% of your "risky" assets in cryptocurrency, but finding the ideal point may mean not investing more than 3%. You want to limit your exposure to cryptocurrency to a small percentage of your total investment portfolio, which is why cryptocurrency serves to diversify your overall portfolio, but should not be your entire investment strategy. This can help limit potential losses while still allowing for upside potential. Diversification in various cryptocurrencies and different cryptocurrency sectors. The old saying not to put all your eggs in one basket is truly relevant when investing in a mix of cryptocurrencies with different market capitalizations, use cases, and blockchain technologies to ensure your financial base is protected. Overall, diversification is a way to reduce risk in your investment portfolio by allocating your assets to various investments. To achieve optimal diversification, these investments should have low correlations with each other. The idea is that if you have two different investments showing positive returns but not always trading in sync, you will still achieve the same level of long-term profit but with lower volatility. For example, with cryptocurrencies, consider large-cap cryptocurrencies like Bitcoin and Ethereum for stability, and explore promising altcoins for growth potential. You can also invest in cryptocurrencies that represent different sectors in the cryptocurrency space, such as Decentralized Finance (DeFi), Non-Fungible Tokens (NFT), or Metaverse platforms. This can further reduce risk by diversifying across different areas of the cryptocurrency market. However, the only issue with using cryptocurrencies as a diversification tool is that they are increasingly correlated with the movements of the stock market, which is currently also somewhat volatile. Consider Stablecoin Stablecoin is a cryptocurrency pegged to a stable asset, such as the US dollar, which can help diversify a bit more stably with this strategy. When it comes to using cryptocurrency as a diversification tool, experts often recommend using something like this. There are thousands of cryptocurrencies you can choose from, but generally, the smaller they are, the more speculative they tend to be. However, if you simply want to diversify your cryptocurrency portfolio rather than trying to speculate on a big winning coin, sticking with the industry leaders is usually your best bet. This can provide a safe haven during market downturns and offer a way to preserve capital while still remaining within the cryptocurrency ecosystem. Rebalance your investment portfolio regularly. When the market changes, your investment portfolio allocation may change, so you should be financially vigilant and regularly review and rebalance your portfolio to maintain your desired level of diversification. This may include selling high-performing assets and reinvesting in low-performing assets to restore balance. An increasing number of investors are using cryptocurrencies as a diversification tool and there may be some benefits to this strategy. Although the correlation is rising, cryptocurrencies remain a fundamentally speculative asset that is different from the stock market. The speculative nature of cryptocurrencies is still a double-edged sword, as it has both explosive growth potential and a significant risk of loss. Therefore, experts agree that especially when used as a diversification tool, the allocation should generally be limited to single digits.