How to Diversify Your Crypto Portfolio 

how to diversify and build a good crypto portfolio

The numbers don’t lie. From 1.7 billion in 2013 to 1.02 trillion today, the crypto market has experienced meteoric growth which would be unimaginable in any other asset class. And over the years, more people have been looking for ways to gain exposure to the hottest new asset class.

But crypto is an extremely loud and noisy space – and it’s pretty common for people to be confused as to where they should start. So let’s start by talking about portfolios. 

With thousands of new tokens flooding the crypto space by the day, it’s usually hard to tell which ones are worth the investment and which ones aren’t. One thing that the current bear market and all the previous ones have taught us is: balance is key. Like any other traditional finance portfolio, it’s important to diversify. Think of it as a buffet where you select bits and pieces across a range of dishes, all to your personalized liking. 

When you hear the word ‘crypto’, you usually think Bitcoin or Ethereum, probably because they’re in the headlines daily. But it definitely doesn’t stop there – to diversify in crypto, you need to know about the different types of crypto in the market. 

5 Ways to Diversify Your Crypto Portfolio

  1. Bitcoin
  2. Layer 1 & 2 Solutions
  3. DeFi
  4. NFTs
  5. Metaverse & GameFi

The standard: Bitcoin

Unless you live under a rock, you have definitely heard of Bitcoin. It is what birthed this whole concept of the decentralized, borderless, and peer-to-peer financial crypto ecosystem. Hence its popularity and fame. If you’re stuck on where you should start investing in crypto, Bitcoin is probably a good place to start. 

Bitcoin (BTC) is the crypto king, ranking highest in terms of market capitalization. BTC has performed outstandingly since its introduction in 2008, both as a cryptocurrency and an investment. This explains the participation and interest of retail and institutional investors alike. It’s well-suited for the broader macroeconomic climate, has deflationary tendencies, and holds a first-mover advantage, meaning it’s common to see other cryptos following the price trends of BTC. 

We all know that crypto markets are extremely volatile – but if you’re looking for a “relatively” safer, stabler option within the crypto space to diversify your portfolio, BTC is your first stop. 

To diversify your portfolio with Bitcoin today, head over to AAX.

Dip your toes in the water: Explaining Layer 1 & Layer 2 Solutions 

The birth of Bitcoin led to an expansion of blockchain technology and now, there are multiple alternative blockchains available. The most common alternative to BTC is Ethereum (ETH), introduced back in 2013. 

ETH is an example of a layer 1 protocol, a term used to refer to any decentralized, open-source blockchain on top of which different applications can be built. Layer 1 tokens like ETH are a good first step to dip your toes deeper into the crypto world and to start diversifying your portfolio from just BTC. Some popular examples are Binance Smart Chain (BNB), Solana (SOL), and Avalanche (AVAX). It’s important to note here that not all layer 1s are the same – you need to dig through each protocol, its unique differentiation points, what range of applications it hosts, and its operational design such as consensus mechanisms. Keep these in mind if you’re lost trying to figure out the difference between their tokens as an investment. 

After layer 1s come “layer 2s.” Layer 2 solutions are built to do some of the heavy lifting for layer 1s, helping their expansion through better security, scalability, or decentralization. Layer 2s are rather infants in comparison to juggernauts like Bitcoin and Ethereum, but many have shown accelerated growth despite the limited time they have been around. A notable example is Polygon (MATIC), the top ranking layer 2 token of all time. It’s designed to help improve Ethereum, which allows cheaper and faster solutions for developers that use the network. Layer 2s are what will scale existing layer 1s, helping them expand in size, security, and efficiency. This type of technology shows great potential in helping blockchain technology eventually reach mainstream adoption, and their tokens are likely going to reflect this potential. To diversify your portfolio with layer 1 and layer 2 tokens, head over to AAX today.

DeFi 

But what do layer 1s and 2s even mean without DeFi? Not much. DeFi encompasses all the decentralized applications (dApps) that are built on top of the layer 1s and 2s, so that it’s not just a technology but a usable one. 

DeFi has scaled incredibly quickly thanks to the entrance of promising projects. And every DeFi project usually launches its unique token with unique functionalities and name. DeFi tokens are typically digital utility tokens used when executing financial transactions or participating in DAOs, or “Decentralized Autonomous Organizations,” for example.

If you’re a believer in the crypto space and what it can mean for the future of our financial economy, DeFi is definitely worth learning about. It’s a way to empower everyday investors in accessing asset types, reduce their fees, and improve their rates. Projects like Compound, Maker, Aave, and Uniswap are some of the most worthy examples. 

Diversifying your portfolio in crypto does come with risk. DeFi especially is still somewhat of a “newborn.” But why are DeFi tokens worth the investment? They are what will drive the mainstream adoption of crypto overall, and provide real use cases which strengthen the credibility and trustworthiness of the technology we’ve been discussing so far. 

To diversify and start your DeFi journey today, head over to AAX and begin trading.

NFTs 

The ultimate buzzword of the past 2 years: NFTs. We’ve seen some of the world’s biggest corporations and institutions enter the NFT space recently – for worthy reasons. NFTs, short for Non-Fungible Tokens, are digital assets that represent real-life objects such as art, music, and even community memberships. The best part? It’s completely driven by code, meaning you ‘actually’ own what you own. This has great implications for digital ownership.

If you want to put a little spin and diversify your crypto portfolio, consider looking into NFTs. It’s important to note, however, that their nature and pricing are even more so speculative than crypto. But numerous projects have come extremely far with NFTs, and they’re just another way that the crypto space is expanding the opportunity for real use cases. I’m sure we’ve all heard of the infamous success of NFT collections like CryptoPunks, Bored Ape Yacht Club and Moonbirds, which have all done unbelievably well. NFTs are a great way to diversify your portfolio, and gain exposure to the next trend that’s taking place in the crypto space. 

Alternatively, you can also diversify your portfolio with tokens that serve as utility tokens for NFT marketplaces if you want to gain exposure to NFTs as a sector but not necessarily want to hold assets from individual collections. We recently wrote about the LOOKS token which powers the LooksRare NFT Marketplace.

Metaverse & GameFi 

And finally, the main characters of 2022: the metaverse and GameFi. These two are sectioned together, as most GameFi tokens are also considered metaverse tokens. 

The metaverse is a pretty broad term, referring to pretty much any virtual reality world of collective and collaborative manner. Metaverse tokens somewhat overlap with GameFi tokens, as all GameFi platforms have their own unique metaverse. As a broad term, the metaverse can also encompass other entities within the crypto space like DAOs and infrastructure providers hosting their own virtual worlds. Some popular metaverse tokens include ApeCoin (APE), Sandbox (SAND), Decentraland (MANA) and Axie Infinity (AXIE). 

With the metaverse projected to grow to $1.8 trillion by 2030, metaverse tokens are worth a consideration when thinking of the different types of tokens you can tap to diversify your portfolio. GameFi being an intersection of gaming and DeFi, has also been found to be relatively resistant to overall bear market conditions, with “$2.5 billion poured into blockchain games in the first quarter of 2022 alone”. The metaverse and GameFi show great potential in changing the game for the crypto space – not only is it scaling on its own, it’s starting to tap into different sectors of the broader economy, eventually leading into mainstream retail adoption. Once again, if you’re a believer of blockchain technology and you’re looking to diversify your portfolio – check this type of crypto out. 

Diversified exposure 

This has only encompassed a peanut-sized section of the entire crypto ecosystem and its different tokens. You can easily discover hundreds of other tokens on AAX Exchange, including all the tokens discussed above. It also allows you to buy and sell tokens within a matter of minutes, through various methods such as credit cards, cash, P2P trading and deposits from external exchanges. 

But before you do – remember the overall lesson here is: don’t put all your eggs in one basket. The downfall of projects like Terra are a clear testament as to why you should always diversify your portfolio. It is a great way to eliminate the overall risk of your portfolio and to gain exposure to a wider range of technologies and projects contributing to the initiative of decentralization. 

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