It’s better to have a larger diversification of cryptocurrencies than to focus on just one because you risk missing out on the handful of good days in the market. Not all coins perform in the same way, and diversification allows you to get exposure to different segments. Cryptocurrency portfolio diversification is a risk management approach that calls for spreading your investments across different coins – it’s the opposite of putting all your eggs in one basket, which can lead you to lose it all in one go.
The 80/20 rule, which articulates that 80% of results come from 20% efforts, can be applied to all areas of life, including investing. A small number of digital assets make up most of the market capitalization, driving profits for investors who can get ahead in the game. As the cryptocurrency market continues to mature, more and more altcoins and innovations sail to their full potential, but they won’t ever measure up to Bitcoin. The Bitcoin price USD prediction can help you make better decisions. Investing in cryptocurrency isn’t a code to be cracked or an activity that requires advanced degrees to achieve success. Still, implementation is key.
The 80/20 Rule Allows Investors to Make the Most Efficient Decisions
The 80/20 rule, commonly referred to as the Pareto principle, requires seeking the most productive outputs that’ll generate the highest returns. In the context of cryptocurrencies, it can be observed in several ways, as follows:
- Blockchain network security: A smaller number of people control a significant percentage of a cryptocurrency. Around 20% of nodes undertake the computational workload for network security, maintaining the integrity and safety of the entire blockchain network.
- Wealth distribution: 80% of society’s wealth is controlled by 20% of its population. In other words, a small percentage of wallet addresses own the most coins – these investors are called whales. Whales drive both bull and bear markets.
- Project success: The Pareto principle shows just how important it is to pinpoint key players and influential projects. Maximize success by focusing your capital on businesses with strong teams, original concepts, and promising technologies.
- Smart contract use: Smart contracts are created by passionate people who want to make a better world for others. The small battalion of people (and organizations) makes an important contribution to the development and application of contracts that are automatically executed when predetermined terms and conditions are met, influencing blockchain adoption.
Cryptocurrencies Fall Into 3 Categories Based on Market Cap: Small, Mid, And Large
Market cap is a metric used in both traditional finance and cryptocurrency markets to measure the popularity of an investment, which is determined by its current price multiplied by the circulating supply. You can use it to compare and rank coins. Digital assets can be classified into small-cap, mid-cap, and large-cap.
Small-Cap Cryptocurrencies
These tokens have a market cap of less than $1 billion, so their price is forever assessed by the market, which leads to substantial swings. Size doesn’t matter, especially when it comes to cryptocurrencies, so take the time to explore small-cap altcoins like Astra Dao, Taraxa, Helium, Velas, Script Network, and so on. Since they’re new and less established in the market, these cryptocurrencies have room for growth, so you won’t be disappointed holding any of them over a long period of time.
Mid-Cap Cryptocurrencies
Cryptocurrencies with a market cap between $1 billion and $10 billion have untapped potential, awaiting those bold enough to seize them. Monero, Tezos, and VeChain are prominent examples of digital assets that are expected to do well in the future and make huge returns for investors, so have a good strategy to adapt to market volatility. Tezos is considered a rather stable altcoin, and if the market momentum and investors’ sentiment positively elevate, 2024 will be a good year for the coin.
Large-Cap Cryptocurrencies
The likes of Bitcoin and Ethereum have a market cap of over $10 billion, which explains why they’re considered lower-risk investments. They’re so big they can influence other digital assets. Large-cap cryptocurrencies have more liquidity, so more tokens are available to trade on exchanges, not to mention that they’re better equipped to withstand market volatility, creating a balanced and diversified portfolio. Large-cap tokens enjoy a great deal of popularity because they offer consistent performance and are less sensitive to small news and events.
80% Should Be in Big Coins, Like Bitcoin, And 20% In Micro-Caps, Like Dogecoin
A low-risk (conservative) cryptocurrency portfolio includes the most stable and oldest coins and provides returns with conservative assets with carefully chosen promising projects. It’ll help you overcome liquidity issues, meaning you can convert your cryptocurrency to cash without much difficulty. Bitcoin is the basis of the portfolio because it maintains a high exchange rate – investor sentiment is bullish and pricing momentum is positive in 2024 thanks to the approval of spot ETFs.
Trading small-cap cryptocurrencies like Dogecoin allows you to get the upper hand on wider spreads by leveraging the larger price moves that can be inherent in these assets.
Taking advantage of the Pareto principle promotes a better understanding of key cryptocurrency market participants, so you can make wise choices based on comprehensive investigation and analysis, using time horizons to reach your goals. If you feel like you’re late to the party, spread out your investment a bit more to have a 40/30/30 portfolio and hedge against elevated inflation, protecting yourself against the decreased purchasing power of money.
Invest 40% in large-cap tokens (Bitcoin or Ethereum), 30% in mid-cap digital assets like Polygon or Hedera, and 30% in small-cap altcoins with strong technology, a large community, or unique use cases.
By having a mix of cryptocurrencies in your portfolio, you can guarantee higher returns and lower volatility, which results in superior risk-adjusted performance. Adding more tokens helps capitalize on the value proposition of various blockchain technologies, unlocking higher profitability over time. The cryptocurrency market has demonstrated time and time again that owning one asset delivers poor risk-adjusted performance in the long run, so aim for a portfolio of diversified digital assets to achieve your personal goals.