Diversification as an investment strategy handily predates modern markets and possibly even written history. After all, if, say, a prehistoric village wanted to ensure a consistent food supply, it probably wouldn’t have pinned everything on just one food source. A village that had crops, domestic animals, and wild game as food would have been more resilient compared to one that relied on just one of these resources.
Fast forward to the present: the same principle still broadly applies to any modern-day allocation of resources. Savvy investors will still spread investments across different asset classes, industries, and geographical regions, forgoing growth potential in order to reduce risk and ensure the continuity of a wider portfolio. Indeed, some observers would peg diversification as the main thing that separates real investors from gamblers.
Arguments over definitions notwithstanding, cryptocurrencies have emerged as a new favorite of investors who want to further diversify their portfolios. As a relatively new asset class, cryptocurrencies offer unique opportunities that simply aren’t offered by traditional stock, bond, property, and fiat money market investments. Here’s what some of the more established cryptocurrencies can bring to your portfolio diversification efforts:
1) A Hedge Against Inflation
Cryptocurrencies like Bitcoin (BTC) and Monero (XMR) have limited supply baked into their designs. In practical terms, this makes them immune to the inevitable inflationary pressures that affect conventional fiat currencies.
Adding a cryptocurrency with good historical performances to your portfolio can, therefore, serve as a hedge against the eroding value of traditional currencies. If you want to use privacy coins like Monero as a hedge, be sure to use a Monero wallet with features that contribute to your diversification strategy.
2) Potential for High Returns
Time and time again, cryptocurrency markets have offered investors significant returns, often outperforming traditional assets over short periods. Given the proven track record of crypto since the early 2010s, including at least a small amount of crypto in your portfolio should provide you with constant exposure to these high-growth opportunities.
3) Portfolio Protection
While you may not necessarily want a portfolio that is entirely made up of cryptocurrencies, you can say much the same out of any portfolio that is solely made up of stocks or bonds. Indeed, because cryptocurrencies have historically shown a low correlation with traditional asset classes like stocks and bonds, they are possibly one of the better choices for diversification, particularly if your portfolio is already a bit heavy on those asset classes.
4) Fewer Boundaries
Unlike many traditional investment markets, cryptocurrency markets operate 24/7. Investing in crypto, therefore, provides your portfolio with growth opportunities without the constraints of traditional market hours. More importantly, the vast majority of crypto networks are not tied to any geographic boundaries, further increasing your portfolio’s overall flexibility.
5) Decentralization
As recent global conflicts have demonstrated, traditional asset classes are easily controlled by centralized authorities, much to the detriment of smaller investors. It’s already proven that cryptocurrencies’ decentralized structures can protect investors against systemic risks associated with centralized control. As such, this makes these blockchain assets an ideal way to preserve your portfolio’s value.
6) Increasing Adoption
Despite the multiple false alarms signaling the demise of cryptocurrencies, the market continues to grow and develop, with an increasing number of institutional investors entering the space. As more major corporations and governments invest in crypto, we should finally see more cryptocurrencies hit critical mass in terms of usage, driving liquidity and stability.
Of course, this will only benefit your portfolio if you’re already holding onto crypto. Holding crypto investments now will likely put you in a great position to take advantage of a demonstrably resilient and promising market.
7) Diversification within Crypto
The ongoing development and diversification of crypto itself is creating opportunities for those willing to cast a wider net when investing. The developing crypto and related blockchain frameworks are putting forth new use cases and different value propositions, each presenting potential opportunities.
In addition, new cryptocurrencies are being developed to address emerging needs. Diversifying your investments within crypto by holding a mix of established cryptocurrencies like Bitcoin and Ethereum, along with proven alternatives like Monero, can further reduce risk and give you more room to grow later on.
8) Access to a New Asset Class
We have to remember that the stock, bond, real estate, and money markets that we’ve come to depend on for the bulk of our portfolio investments did not develop overnight. Indeed, they all took decades, if not centuries, of evolution before they reached their present forms.
As an asset class, it bears pointing out that cryptocurrencies are not even two decades old. Their potential remains largely unexplored, and there may still be opportunities available in them that might not be available elsewhere.
Consider for the moment that the disruptive nature of blockchain technology, the foundation of cryptocurrencies, is only now being widely felt in finance, supply chain tracking, and healthcare. With at least some crypto in your portfolio, you will be able to participate in any transformational growth related to decentralized blockchain currencies.
Don’t Leave Crypto Out Just Yet
Cryptocurrencies may not be for everyone, but leaving them off the table when it comes to your portfolio diversification might be a mistake. The asset class’s novelty, coupled with its inherent disconnection with conventional assets, make it a particularly attractive way of hedging your bets and building an exceptionally well-balanced mix of assets in your portfolio.
As with any investment, however, the key to success with crypto is to understand how its specific qualities can complement your current or expected future mix of assets. With thorough research, you’ll hopefully allocate just the right amount of capital to the cryptocurrency assets that make the most sense for your investment strategy.
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