How to diversify in crypto? I made a mistake.
This week, I talked with two friends about my current outlook on cryptocurrencies other than Bitcoin. I was always a Bitcoiner and in the camp of Ethereum skeptics. I had a small amount of Ethereum, but I sold all of it at $10 because I didn’t see it going anywhere, right before the first ride to $400.
I didn’t get back in, even after changing my mind about it while observing the hype for CryptoKitties. Many people found this game utterly stupid, but it was precisely the moment when I realized that Ethereum is not going anywhere because, no matter what I think about those use cases, they are real and create a real market.
This chart I attach below shows the top 10 cryptocurrencies by market cap yearly since I started investing in Bitcoin. As you can see, Ethereum indeed confirmed its status and firmly stayed “number two” for the last few years. My bad!
It’s essential to notice that XRP, which is the only other coin present in the top 10 during this time, has an artificial market cap because not all tokens are truly on the market. 100 billion XRP was pre-mined at the launch. 80% of the tokens went to the Ripple Labs foundation, which sells XRP periodically at market prices but still owns over 40%. It’s vastly thanks to this trick that it stays so high during this time, and as you can see, recently it started to fall.
No other coin managed to keep up. This is an essential observation for any cryptocurrency investor, because:
It’s still ok to buy only Bitcoin
Bitcoin is the currency that represents the whole crypto market. Long term, when it’s up, the entire market is up, and when it’s down, the market is down, but… it’s down less than 99% of other coins. So functionally, Bitcoin is the crypto index fund with 0% managing fees. In the same way, you can only buy SP500 and win with the majority of stock pickers; buying only Bitcoin is, most of the time, the best choice.
But let’s face it. We love to make predictions, feel smart when we guess correctly, and, frankly, complicate our lives to make it more interesting. It’s ok! Just don’t play with the majority of your investment money. Instead, put 70% in Bitcoin, 20% in Ethereum, and 10% in other tokens. I’ll be back to this topic when portfolio rebalancing arrives at Deltabadger.
But Bitcoin dominance goes down!
That’s true, but it’s only natural: it’s going down because more and more tokens appear from nothing, constantly creating new market caps while new bitcoins appear very modestly. However, while Bitcoin’s share belongs only to Bitcoin in this other part, coins continuously replace each other. There are over 1700 dead and forgotten projects already.
So, how to diversify?
The best reason to buy other cryptocurrencies is if you use them not only as an investment. Maybe you mine some smart contracts on Ethereum sometimes; then keeping ETH is perfectly reasonable. Maybe you own Legendary Badger NFT because you use the platform. Great!
But if you truly want to diversify your portfolio, think more about classes of assets. I talked about it last time, discussing investing in silver. Hold crypto, precious metals, stocks, and cash — this is how you get diversification. A portfolio of 10 altcoins is hardly that.
I made a mistake, so you don’t have to
I hold Bitcoin, silver, and stocks, but I made one mistake too. Among my stocks, I have Coinbase. It’s wrong not because the stock is down but because it will most likely move together with crypto. So, don’t be me! If you want to buy Coinbase, buy Bitcoin instead. Use stocks to invest in other sectors.
What assets do you invest in? Altcoins? Stocks? Precious metals? Real estate? Share your portfolio a little. Percentage-wise, of course!