It’s often assumed as ‘common knowledge’ that every cryptocurrency portfolio needs to be diversified. However, 2018 and 2019 has taught cryptocurrency investors that this may just be a trap.
In August 2017, CNBC ran a special on a properly-diversified cryptocurrency portfolio. The breakdown was something like this:
- 30% Bitcoin (BTC)
- 15% Ethereum (ETH)
- 15% Ethereum Classic (ETC)
- 10% Zcash (ZEC)
- 10% Monero (XMR)
- 10% Ripple (XRP)
- 5% Metal (MTL)
- 5% IOTA (MIOTA)
In hindsight, this distribution seems terrible — and that’s exactly the case analyst Ben Perrin makes in his new piece, “The Crypto Diversification Trap.”
Diversifying Your Losses
As Perrin writes, if you had held that same portfolio until the time of this writing, you would have been better off being 100 percent all-in Bitcoin (BTC).
- Ethereum (ETH): you would have lost -75% in satoshis (sats).
- Ethereum Classic (ETC): you would have lost -85% in sats.
- ZCash (ZEC): you would have lost -91.59% in sats.
- Monero (XMR): you would have lost -39.14% in sats.
- Ripple (XRP): you would have lost -34.42% in sats.
- Metal (MTL): you would have lost -99% in sats.
- IOTA (IOTA): you would have lost -90% in sats.
As you can see, so-called ‘diversification’ would have led to an absolute bloodbath.
However, you would have been up 33.56 percent in dollars — but way down in sats.
The only cryptocurrencies which would have brought you USD profit during this period are BTC, XRP, and XMR.
Lessons to Be Learned
There are a few key takeaways from Perrin’s piece. He tends to gravitate towards a completely Bitcoin maximalist position. However, the truth is that the story is a bit more complicated than that.
First off, don’t assume all the top 20 cryptocurrencies are going to lead the pack forever. If you look at 2015/16, the top 20 looked far different. You probably wouldn’t even recognize many of those cryptocurrencies today. So, don’t hedge your bets on Ethereum Classic or ZCash for the long-term.
Secondly, look for cryptocurrencies which are well-positioned: look at GitHub activity (most important), connections, expertise, use-case, and if it is actually trying to solve an existing problem rather than create one to solve.
Diversifying for the sake of diversifying is not a strategy at all. You’re just overextending yourself for no reason.
Be sure to also check if there are many bagholders leftover from the 2017 cycle. If so, you may want to rethink your investment since that particular cryptocurrency is going to have an especially hard time.
Over-diversifying will just lead you down a terrible and dark road with multiplying losses. Learn from the last market cycle and don’t put your eggs in too many baskets this time.
Do you agree that over-diversifying your portfolio can sometimes be a trap? Let us know your thoughts in the comments down below. And if you want to trade altcoins, why not do so on Binance? Alternatively, you can trade with a multiplier of up to 100x on StormGain!
[Disclaimer: This article is not financial advice.]