Diversifying Your Portfolio: The Best Cryptos for Different Risk Profiles

Risk is an inherent part of any investment. Smart capital holders search for opportunities where reward or risk premiums offset potential downsides and create the necessary conditions to ensure long-term growth and stability of the whole portfolio. A perfectly balanced asset does not exist. However, one can try to create a composition of assets that performs well under different circumstances.

Choosing the best cryptocurrencies for different risk profiles is like playing an endless game of mix and match. In the world of crypto, digital assets are dynamic in nature. As infrastructures, utility, and adoption rates change, so do the market metrics of tokens. It means that an investor hoping to build a balanced portfolio must also think dynamically and adapt when needed.

Following this logic, there is no best crypto to buy. There is the most optimal coin for a particular type of portfolio in a particular period of market history. By using this assumption, a contemporary investor can create a well-performing composition of tokens that deliver consistent returns. The question is when to pick which.

Conservative vs aggressive investing

DeFi investors cannot be classified as either if we follow traditional definitions. The whole crypto market is an aggressive asset class with quickly growing investments and high risks all around. However, we can still use this classification to talk about different approaches to crypto investing.

A solid definition would sound like so:

1. A conservative strategy focuses on minimizing risks while creating highly consistent profitability operating with relatively small risk premiums.
2. An aggressive strategy prioritizes high returns at moderate risks by focusing on wide diversification and selecting tools that offer higher risk premiums.

Since both approaches are ultimately tasked with creating wealth for capital holders, the former has a slightly longer investment horizon as it takes more time to earn the same amount of money as in the case of a successful aggressive investment. A DeFi user interested in building an effective portfolio should take time into consideration.

Risk management in crypto investments

The selection of tokens occurs based on adopted risk management techniques. Many methods of reducing risks exist. Some of them work well with aggressive approaches. Others will do better for conservative investors.

Here are several examples of risk reduction approaches:

• Diversification. Instead of focusing on a single financial instrument, an investor can spread their capital across multiple options. Here, the important of continuous education and research in understanding risk profiles associated with different types of assets is incredibly important. Diversification is important in all strategies. However, conservative approaches usually employ a reserved approach and split investable capital among several safe options while aggressive portfolios may hold dozens of market positions hoping that one of them will shoot to the moon.
• Position sizing. Creating massive positions is dangerous due to a variety of factors. Here, understanding the intimate relationship between market volatility and diversification is key to success. Limiting potential losses on market positions by utilizing delayed orders (stop losses and take profits) while maintaining an appropriate size of holdings relative to their risk level is hugely important for any strategy. Note that over 70% of retail investors lose money in the crypto market by risking more than they can afford.
• Avoiding leveraged positions. Some experts say that there are conservative strategies, aggressive strategies, and reckless ones. Taking on debt to increase exposure is never a good idea. It works for people with access to reliable, actionable insights, insider information, and superhuman intuition. The vast majority of investors using leverage ultimately lose money. BitMEX claims that over 70% of all retail investors who trade using margin accounts suffer financial losses.

Also, you should always keep in mind how technological advancements are influencing portfolio diversification strategies. Using tools like backtesting for automated trading systems, purchasing insurance for large positions, and practicing emotional discipline can solidify your long-term game. Many tools can be extremely useful in this regard.

Note that many risk management techniques work only if investors adhere to them strictly. Investment is often a gamble, but even in games of chance, there is a so-called expected value. Over a long enough period or thousands of trades, you will see the fruits of your discipline and labor.

Stablecoins and altcoins

The crypto market has a variety of digital assets. While many have uncanny similarities, there are several distinct categories:

• Mainstream crypto coins are the ones forming the bulk of the market. Bitcoin and Ethereum account for 69% of the market.
• Altcoins are alternatives to mainstream offerings. Litecoin is a copy of Bitcoin. Cardano is the main antagonist of Ethereum.
• Stablecoins are tokens that are pegged to a reference fiat currency (usually, the US dollar). Examples are Tether (USDT) and USDC (USD Coin).

Most successful crypto portfolios incorporate these assets depending on their approach to investing and risk profiles. Altcoins are riskier, but many of them are relatively cheap, have room for growth, and promise to catch up to mainstream chains. Every single one of them is a bet that can pay off greatly. Mainstream tokens form the core of many crypto funds and individually managed holdings as they are considered reliable and consistent.

Stablecoins are great for DeFi users and active retail traders. You can have a good position with stables if you are willing to invest them in DeFi protocols or leave them “hanging” on a balance at a centralized exchange that needs liquidity. For instance, Kraken offers up to 5.5% on USDT holdings.

The future of cryptocurrency diversification

Contemporary retail investors can access a wide range of digital assets with varying levels of risk. Experts are still hesitating to call whether the DeFi ecosystem is contracting or expanding in terms of accessible investment instruments. However, already existing tools are plenty enough to allow investors to build all types of portfolios.

The impact of regulatory changes on the selection of cryptocurrencies for diversification is felt only by investors who do not transition to the DeFi ecosystem. Decentralized finance is still largely unregulated and anonymous allowing users to invest safely. DeFi users have thousands of options when it comes to allocating capital.

The ocean of available investment instruments creates a problem for newcomers who may feel lost among over 14 thousand pools across over 460 protocols. A good solution is going to the yield marketplace at Rivo to explore a rich selection of strategies that were diligently researched and verified by a team of professionals. Here, you can find an appropriate strategy for any portfolio regardless of risk profile.

Visit Rivo today and explore the rich world of DeFi investments. Learn how to stay updated on emerging trends and tools for portfolio management in cryptocurrency markets by reading the blog, interacting with Maneki Ai, and browsing featured investment strategies on the marketplace!