Diversification in cryptocurrency investing goes beyond simply holding multiple coins. It involves strategically spreading risk across different assets, protocols, networks, and strategies while maintaining exposure to the market's growth potential.
Types of Diversification
Asset Class Diversification
- Market Cap Categories:
Recommended Allocation Model:
- Large Cap (>$10B): 50-60%
- Mid Cap ($1B-$10B): 20-30%
- Small Cap (<$1B): 10-20%
- Stablecoins: 10-30%
- Token Categories:
- Layer 1 Protocols
- Layer 2 Solutions
- DeFi Tokens
- Gaming/Metaverse
- Privacy Coins
- Exchange Tokens
Protocol Diversification
DeFi Protocol Distribution:
Sample DeFi Allocation:
- Lending Protocols: 30%
- DEXs: 25%
- Yield Aggregators: 20%
- Insurance: 15%
- Other DeFi: 10%
Network Diversification
Cross-Chain Distribution:
Network Allocation Example:
- Ethereum Ecosystem: 40%
- BNB Chain: 15%
- Solana: 15%
- Other L1s: 20%
- L2 Solutions: 10%
Portfolio Construction
Basic Portfolio Models
- Conservative Model:
- Bitcoin: 40%
- Ethereum: 30%
- Top 10 Alts: 20%
- Stablecoins: 10%
- Moderate Model:
- Bitcoin: 30%
- Ethereum: 25%
- Top 20 Alts: 30%
- DeFi Tokens: 10%
- Small Caps: 5%
- Aggressive Model:
- Bitcoin: 20%
- Ethereum: 20%
- Alt L1s: 25%
- DeFi: 20%
- Small Caps: 15%
Risk-Weighted Allocation
Volatility-Based Weighting:
Position Weight = (1/Asset Volatility) / Σ(1/Asset Volatility)
Example:
BTC Volatility: 60%
ETH Volatility: 80%
Alt Volatility: 100%
BTC Weight = (1/0.6) / (1/0.6 + 1/0.8 + 1/1.0) = 41%
Correlation Analysis
Portfolio Correlation Matrix:
Maximum Correlation Rules:
- High correlation pairs (>0.7): Limit combined exposure to 25%
- Medium correlation (0.4-0.7): Limit to 40%
- Low correlation (<0.4): No specific limit
Implementation Strategies
Portfolio Building Process
- Initial Setup:
- Define investment goals
- Set risk tolerance
- Choose allocation model
- Select assets
Implement positions
Monitoring Metrics:
Portfolio Health Score =
(Diversification Score × 0.3) +
(Risk Score × 0.3) +
(Performance Score × 0.2) +
(Correlation Score × 0.2)
where each score is 0-100
Rebalancing Strategies
- Time-Based Rebalancing:
Rebalancing Threshold = Target Allocation ± 5%
Frequency: Monthly or Quarterly
Example:
Target BTC: 30%
Current BTC: 37%
Action: Reduce BTC position by 7%
- Drift-Based Rebalancing:
Drift Threshold = (Current Weight - Target Weight) / Target Weight
Rebalance when |Drift| > 20%
Risk Management in Diversification
Position Sizing
Maximum allocation limits:
Single Asset Limits:
- Large Cap: 40%
- Mid Cap: 20%
- Small Cap: 10%
Category Limits:
- Single Network: 50%
- Single Sector: 40%
- Unaudited Protocols: 15%
Drawdown Protection
Portfolio Protection Measures:
Stablecoin Reserve Ratio = Monthly Volatility × Portfolio Value
Example:
Monthly Volatility: 15%
Portfolio: $100,000
Minimum Stablecoin Reserve = $15,000
Latest comments (1)
Good starting point for newbies such as I :) Crypto is pretty big in Zurich where I live, I figured it's time I get into it !
Mit freundlichen Grüssen
Bilal Andrews
Florist Zürich