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Crypto portfolio diversification is the act of putting your money into different cryptocurrencies to mitigate risk if one or more projects perform poorly. Picture: SUPPLIED/REVIX
Crypto portfolio diversification is the act of putting your money into different cryptocurrencies to mitigate risk if one or more projects perform poorly. Picture: SUPPLIED/REVIX

Cryptocurrencies such as bitcoin and ethereum have come a long way as there are now more than 5,300 digital currencies. Though only the top 10 cryptocurrencies are considered the most tradable and make up the bulk of the market, this huge adoption and population speak volumes about the state of crypto.

If you want to or have already invested in cryptocurrency, one of the best things you can do is diversify your portfolio. 

What’s crypto portfolio diversification?

Diversification is a bedrock principle of sound investing, and with cryptocurrencies, diversification is arguably more important. 

Crypto portfolio diversification is the act of putting your money into different cryptocurrencies to mitigate risk if one or more projects perform poorly. Many crypto investors only hold a single crypto, such as bitcoin, but this approach is extremely high risk for two reasons:

The future of cryptocurrency adoption and growth is uncertain.

The cryptocurrency industry is just a little over a decade old. In human terms, this market is barely a teenager; this means that a lot can still happen. While the crypto market has created value for early investors, it still has the potential to increase many times over, but just like the early days of the internet, this growth will not be equally spread. 

Maybe ethereum will be the blockchain backbone of the future, or cardano or solana will take its place. Perhaps bitcoin will replace gold as the world’s largest store of value and inflation hedge, or perhaps a new cryptocurrency will come along and do this. True wisdom is knowing that we don’t know what the future holds, and in the fast-paced and nascent world of crypto, gambling on a single project is not a smart strategy.

Rather increase your chances of owning the Amazon-like success stories by holding multiple cryptocurrencies.

The total return of your investment is dependent on the success or failure of a single cryptocurrency project. 

An investment into a single cryptocurrency provides you with 100% of the gains or losses associated with that asset, but not all cryptocurrency gains are equal. Over a year, there can be differences of 2,000% in gains between the top cryptocurrencies, as what happened recently with cardano and binance coin. This means investing in a single crypto gives you less exposure to the sometimes unpredictably good performance of another asset.

There was once a good case in holding only bitcoin, but over the past four years, the total value of bitcoin vs the total value of all cryptocurrencies has declined from 85% to about 44% at the time of writing. This means other cryptocurrencies, through significant gains in value, have outperformed bitcoin.

More on these returns are shown below:

Picture: SUPPLIED/REVIX
Picture: SUPPLIED/REVIX

What’s going on here?

Simply put, smaller cryptocurrencies (called alt-coins) such as ethereum, polkadot and cardano have outperformed bitcoin.

The reason for this is that bitcoin itself took the blockchain and used it for a single purpose: as peer-to-peer decentralised electronic cash. That’s it.

Ethereum and cardano employ a blockchain just like bitcoin, but these crypto projects aspire to do much more: they are competing to become general-purpose blockchain infrastructures, capable of running complex operations in the form of smart contracts.

How to safely and easily diversify in crypto?

One approach to get exposure to potential winners and to increase your chances of owning the next bitcoin is to equally spread your investments across a “bundle” of cryptocurrencies. This gives you an equal opportunity to get increased returns over multiple assets as opposed to just one, and gives you a greater chance of catching multiple winners each month if your diversified portfolio is adjusted every month to track the top assets at that time.

As proof of the benefit of diversifying, consider that while bitcoin is up 430% over 12 months, Revix’s Top 10 Bundle (equally weighted over the top 10 cryptos as measured by market cap) is up 790% over the same period. You were far better off invested in the top 10 bundle than a straightforward holding of bitcoin.

The Revix Smart Contract Bundle (invested equally over the five largest smart contract-focused cryptocurrencies) is up 660% over 12 months, against 447% for the Revix Payment Bundle (invested in the five largest payments-focused cryptos).

Sean Sanders, CEO of crypto investment company Revix, which is backed by JSE-listed Sabvest, says: “The value of diversification is a well-researched and understood feature of investing. Any way you slice and dice the numbers, a diversified crypto portfolio will give you better risk-adjusted returns and often better absolute returns over time. That has been particularly evident over the last year.

“Diversification works in every asset class in the world. It should come as no surprise that it works in crypto as well.”

How to diversify using Revix Bundles?

The Top 10 Bundle is similar to the JSE top 40 index or S&P 500 for crypto and provides equally weighted exposure to the top 10 cryptocurrencies making up more than 85% of the crypto market. This bundle includes all the cryptocurrencies mentioned in this article and has outperformed bitcoin over the past 12 months.

The Payment Bundle provides equally weighted exposure to the top five payment focused cryptocurrencies looking to make payments cheaper, faster and more global. These cryptos include the likes of bitcoin, ripple, bitcoin cash, stellar and litecoin.

The Smart Contract Bundle provides equally weighted exposure to the top five smart contract-focused cryptocurrencies such as ethereum, cardano or polkadot that enable developers to build applications on top of their blockchains, similar to how Apple builds apps on top of its OS operating system.

Revix’s bundles have outperformed an investment in bitcoin alone over a one-, three- and five-year period.

All Revix’s bundles are rebalanced monthly, this means the best performers move into the bundle, and poor-performing assets are dropped to catch as much upside as possible each month. 

“Owning a Revix Bundle, like owning a diversified low-cost exchange-traded fund or unit trust in the stock market, is the smartest and arguably the lowest-risk way to get exposure to the broader universe of cryptocurrencies,” says Sanders. “The Revix Bundle approach ensures that you will always have exposure to the best stories within the crypto market without taking on too much risk.”

Sign up today at Revix.com and receive double your initial deposit up to R500 using the promo code: DOUBLEUP

This promotion is valid from August 17 to 31 2021.

For more information, visit www.revix.com.

This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose, and before investing, please take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

This article was paid for by Revix.

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