Ways to Protect Your Portfolio: Why Diversify Beyond Cryptocurrency?

Ways to Protect Your Portfolio: Why Diversify Beyond Cryptocurrency?

Mary Ann Callahan  | Aug 29, 2019 10:18

Because of the rapid emergence of the crypto economy over the last few years, currently, many people around the world have newfound wealth to take care of. They have successfully surfed the wave of a quickly expanding industry. But, as the cryptocurrency has attracted mainly novice investors over the last few years, many aren’t thinking much about expanding their growing portfolios beyond cryptocurrency.

This can be risky in the future prosperity. Bitcoin and other cryptocurrencies have been fantastic investments over the last 10 years (probably the best in the world). But, having all of your wealth concentrated in one place is almost always a bad idea. Here are some proven ways to protect your crypto wealth and diversify your portfolio beyond just Bitcoin and altcoins.

Why diversify beyond cryptocurrency?

Cryptocurrency has performed astonishingly well compared to other traditional assets over the last 10 years. But, that doesn’t necessarily mean that ride is going to continue in the same way long into the future.

Cryptocurrency is still one of the riskiest assets in the world. It’s common for the price to plummet 30% in a matter of days (sometimes hours). There’s also the risk of regulation, new competing coins, and any given cryptocurrency network failing completely.

All smart investors have a well-diversified portfolio. This protects their wealth by exposing them to a variety of different investments, each of which would have a different reaction to the same event. For example, a news headline that warns of economic risk would likely have a positive effect on the price of gold, but the opposite effect on stocks. Owning both investments ensures that one event can’t do too much damage to your overall portfolio.

This means you can live with a bit more peace of mind. Imagine how stressed the guy that sold his house for Bitcoin must be every time a news story crashes the Bitcoin price and takes 30% off of the total value of his wealth.

Spreading out your risk

Diversifying beyond Bitcoin is the first step that many cryptocurrency investors make. This is a good move. Having a large chunk of your net worth in a single volatile asset is extremely dangerous. On the contrary, expanding to different coins and other tokens is a good idea.

But moving beyond just cryptocurrency is also important. This might be an uncomfortable territory for many cryptocurrency investors, but it’s a vital step to take. Here are some alternative investments you may want to think about when you cash out some of your cryptos.

Gold and Bitcoin are seen as related investments. Both are used by investors as “safe haven” assets. Things that go up in value during times of economic crisis (as opposed to say, stocks). Although, the correlation between gold and cryptocurrency is known to frequently break , too.

Gold is also historically a very stable investment. The price of gold doesn’t fluctuate like Bitcoin and other cryptocurrencies. This is why gold is a great investment to start diversifying your portfolio.

Don’t worry, you probably won’t have to actually buy physical gold and hide it in your backyard. These days, gold can be easily bought and traded electronically through Exchange-Traded Funds, much like the Bitcoin Exchange-Traded Funds the tried to get approved.

Traditional investments

In addition to gold, there are many other kinds of traditional investments that are fantastic for diversifying beyond your cryptocurrencies. Some of the most popular ones are cash, stocks, bonds, real estate, index funds, and mutual funds.

Cash is the simplest investment. Simply cash out your cryptocurrency to fiat currency and you’ve diversified. However, you may want to diversify beyond one currency, and you’ll definitely want to make sure your cash is in high-interest accounts to stay ahead of inflation.

The stock market is one of the most popular investments in the world. You can even invest in companies that have a vested interest in cryptocurrency technology (e.g. now Facebook with Libra) to make things interesting. However, investing in individual stocks isn’t usually a good idea for smaller investors. The fees and costs of buying multiple stocks will quickly run down small investments. Index funds are likely to be a better option for most cryptocurrency investors that are looking to diversify their portfolios to protect their wealth.

Real estate can also be a great option. Especially if you’ve made a considerable sum in the crypto market.

Other interesting investments

Beyond the traditional and most popular options, there are some products that you can buy so they could hold your wealth. While most consumer products lose value quickly over time, some can hold value and even increase in value over the long-term. Some of those include classic old-timer cars, jewelry, and exclusive timers or watches. Boutiques like BitDeals is a catch for Bitcoin community. Sure, such expensive investments fit better for expert traders or early-adopters of cryptocurrency, but the idea that being a crypto investor you can afford to buy such fancy things with Bitcoin is impressive.

Rebalance your portfolio regularly

Once you’ve decided on how to diversify your portfolio beyond cryptocurrency, and what proportion of your wealth to redistribute, it’s important to maintain this balance in the future. One investment type in your portfolio may increase in value more quickly than the rest. When it does, you’ll need to cash out some of that investment to rebalance your portfolio.

For example, say you decide to invest 50% of your cryptocurrency portfolio into other investments. If cryptocurrency goes up in value by 100%, now only 66% of your portfolio is made up of cryptocurrencies and you have less protection. You’ll have to cash out some of your cryptos and buy more traditional investments to maintain the 50-50 split.

Keep Your Money Protected

If you’ve been investing in cryptocurrencies for a while, you’ll probably be used to risky investments. But, it’s always a good idea to keep your wealth and future protected. The best way to do that is to diversify your portfolio and dedicate a percentage of your wealth to different, uncorrelated investment classes.

Mary Ann Callahan

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