Having a diversified portfolio is not only for stock market traders, every investor should manage portfolio theories! A proper understanding of coins categorization will help you to create a diversified portfolio. Balancing the risk is an important part of the game and investors must know how to limit their losses in such a volatile market.
As expressed in one of our first articles, many investors commit the mistake of having 70% or even 80% of their funds invested in small-caps cryptocurrencies, without taking into account that those are the coins that tend to suffer from strong manipulation and in some cases, fraud. Big market movers (also called whales), usually control the supply and price of those cheap coins, and your portfolio could be severely affected by those movements. Your work as a trader and as an investor is to determine throughout extensive research, which of those mid-cap and small-cap coins could perform better in the years to come.
To build a diversified portfolio, investors must be aware of two types of risk:
- Systematic risk: this is the risk associated with the crypto market as a whole. The overall performance of the crypto world is able to affect the whole portfolio, positively and negatively. Those types of risks cannot be eliminated but it can be reduced. For those cases, we highly recommend you to have a fluent understanding of the use of stable coins to freeze the value of your holdings when needed.
- Idiosyncratic risk: also called coin-specific risk. Every coin has its own risk, thus, every trader must evaluate how volatile each asset each, in order to balance its holdings and have a set proper stop losses/ take profits. An exhaustive research is needed, as every digital coin has a different fundamental background affecting its price action.