Why are crypto millionaires diversifying? Ideally, your chances of becoming a crypto millionaire within a short period of time will be pretty small if you start small, and even if you do become one, it will take a long time.
Diversification, as such, will make the chances even smaller and you will take a much longer time to become a crypto millionaire in comparison to concentrating on one specific bet.
However, diversification still is a sensible strategy to follow, especially for the millionaires.
Different people follow different ways to diversify their portfolio based on the concept they have.
However, the general structure of a diversified crypto portfolio should be:
- 50% Bitcoin, which will stabilize your portfolio during bad days
- 25% mid-cap coins, which will offer reasonably good risk to reward ratio and
- 25% low-cap coins, which will allow you to get a random 5x to 100x leverage when you hunt for gems.
It is up to your wish and budget whether you want to hold 1 coin or 50 coins. And, you can also diversify into other avenues completely.
Now, this can be confusing if you do not look into the details.
Here is an article that will not only tell you why crypto millionaires like to diversify and you should do as well but also other important aspects of it.
This will enhance your knowledge and help you to make more decisive decisions.
Contents
Why are the Crypto Millionaires Diversifying Portfolio?
Bitcoin and Ethereum are the two most favored coins by the crypto millionaires and most of the current millionaires have gotten in early on them.
However, there are others as well who are in Initial DEX Offerings or IDOs, which are crypto equivalent of an Initial Public Offering or IPO.
If you hold a lot of crypto, there is a chance that you may lose it all if something unexpected and untoward happens, especially if you have invested in only one type of crypto coin.
This is the last thing that the crypto millionaires will want to happen to their portfolio, and hence, they diversify into different coins and avenues as well. This reduces the probability of very bad, and even very good, events.
Like most crypto millionaires, if you too treat your crypto investments same as venture capitalism, then you may expect the different types of crypto coins to behave just like the money of the venture capitalists who invest in different businesses that have a high potential for growth in exchange for an equity stake.
9 out of 10 businesses may not survive or sustain and go down to $0, while one 1 may see a 100x growth.
This will make up for the losses incurred by the venture capitalists due to those 9 ventures that have failed. It is just the same in the case of crypto investment.
Of course, this can only happen when you make sure that you do the same amount of research and meticulous due diligence just as the venture capitalists do.
Typically, rich people seem to have the tendency to follow the same process while investing in some valuable asset such as a house or Bitcoin.
They tend to own and hold it eternally and someday when they need money tend to finance against it.
Just imagine how good it would have been in such situations if they have a few houses and a lot of different coins?
Therefore, diversification is necessary and the experts recommend owning a few different types of crypto coins.
It is only when you have a proper asset allocation plan you will be able to earn millions from these different crypto coins, some of which will increase 2x, some 5x, some 10x, some 50x and a few 100x.
Therefore, it is always good to have a few coins.
The profits gained will be immense and it will balance the losses that you may have incurred on a couple of coins.
Now, when it comes to diversifying your crypto portfolio, perhaps the best approach is to find the best of three and work to make the best out of them.
This will ensure that you make better and higher profits because ‘Jacks of all trades are masters of none’ and this turns out to be true in the case of crypto investments as well.
Diversification, as such, is typically a practice of ‘not putting all the eggs into one basket’ with a hope of not losing everything when something disastrous happens.
This is its primary benefit, as said earlier. However, it comes with a cost such as:
- It will limit your upside and
- It will mean additional fees.
The former is more significant and the latter is not only in terms of money but also in terms of time, effort and attention to several other aspects of your crypto portfolio.
These aspects include management and upkeep of your crypto account and storage of several other things apart from your private keys or coins.
You will also need to be concerned about the wallet and its types, information and updates on the coins, physical locations, tax requirements, and more.
The list may grow exponentially when you diversify.
On the other hand, when you hold only one type of crypto coin and if it increases 100 times in value over time, it is great.
Your crypto portfolio will have done 100x. You can sell it off and gain 100 times! But what if it goes down to zero?
Your entire portfolio will also go down to zero along with it.
Alternatively, when you hold 20 or 30 different types of coins it is highly unlikely that all of them will do 100x at the same time.
On the other hand, it is also very unlikely that all of them will go down together at the same time and take your entire portfolio to zero.
That is why a diverse portfolio is good to have since you will not be incurring huge losses no matter whatever is the situation.
But at the same time, you will also not make huge gains from your crypto portfolio. That is typically the tradeoff.
In the light of diversification of portfolio, crypto seems to be an important exception.
In this case, diversification works only because all the crypto assets you choose will not go up or down altogether at the same time.
This means that the crypto assets are not correlated with each other.
This however defies the fact that most of the crypto coins experience a rise or fall in price together and it is largely due to the rise or fall in the price of Bitcoin.
This means that the crypto cons are correlated with Bitcoin and each other!
This also means that the crypto portfolio that contains a wide variety of coins in it and is considered to be well diversified may not be actually diversified at all.
This is because all the coins move in tandem and follow the same trajectory.
You can see it yourself when you check different price charts of crypto coins at different times.
Diversification of crypto portfolios is typically a favorable approach of the long term holders.
These are the users who hold the coins in their wallets for a period of one year at least or more.
On the other hand, if you are an active crypto trader and watch the prices of coins every day and make trades on a daily, weekly, or even on a monthly basis, diversification may not probably be a crucial factor for you.
This is because you will be moving from your positions more often.
However, for the long term holders, irrespective of their trading frequency and style, the key point is that if the benefits offered by the diversification in crypto are to be enjoyed, it will not happen until the crypto market matures significantly.
And, it may take about ten years, especially for a one crypto only portfolio because, as you may know, cryptocurrencies are very volatile.
If you are looking to diversify your crypto portfolio, one good way is to trade into an Initial Coin Offering or ICO.
This is perhaps the best way to branch out of Bitcoin given the prospects of growth of the ICOs without alerting the IRS or Internal Revenue Service, the HMRC or Her Majesty’s Revenue and Customs, and even the government.
However, there is an additional wrinkle – tax. It was not long ago when the government disagreed on whether crypto is a currency or a property and therefore exempted Bitcoin from being taxed.
Moreover, it was difficult for the tax authorities to find the holders and tax them because Bitcoin is held almost anonymously.
However, as of now, crypto is taxable when you make a capital gain while converting the coins into cash.
Another good reason that the crypto millionaires diversify is the steps taken by the Chinese government.
Bitcoin millionaires believe that at least one-fourth of their assets can be wiped out completely in an instant.
This is because Bitcoin is extremely volatile and wild price swings are not uncommon.
This, they feel, will be further aggravated down the lane when other countries also follow the suit of the Chinese government and tighten the rules and regulations severely around Bitcoin.
Therefore, they need to act or react quickly and what better way there could be other than diversifying their portfolio.
ICOs at present are the craze and there are lots of reasons behind it.
However, the key is to ignore the noise and only follow the ideas that are really solid and will increase the value of the underlying asset significantly over the years.
ICOs can really pay off as a worthy investment instead of Bitcoin because its value fluctuates justly like a currency and can be traded like Bitcoin.
This means that any unspent coin may or may not appreciate in value, which is in accordance with the principle of any type of investment.
However, the good thing about it is that you can cash them out for Bitcoin or any other regular fiat currency of the real world if you do not want to hold them anymore.
This means that an ICO is a digital credit that gives you the right to a purchasable asset.
Apart from that, the crypto millionaires are also diversifying into property, and you should do as well.
But, why property after all, you may ask? This is why: they feel it is a good way to protect their wealth.
There are also other reasons to it as mentioned below, which are, however, the same for other forms of and avenues for diversification of a crypto portfolio as well.
Halving Cycle
As you may know, crypto coins typically have a finite supply.
Therefore, whenever there is a large number of coins mined, including Bitcoin which has a finite supply of 21 million, the number needs to be reduced in order to limit the supply.
It is also done to ensure that the price of the coins remains high even if the number increases.
This is done by reducing the rewards to half, a process typically known and ‘halving’ in the crypto world.
Typically, for Bitcoin, a 4-year cycle is maintained. This means that after every four years, the number of newly created coins or rewards will be split in half.
This halving reduces the supply and results in an increase in the price since even if the demand remains the same or rises.
Typically every halving cycle is followed by a bull run in the market and there is significant change noticed in the prices of the coins that cause such a bull run as well as in the behavior of the market along with all its participants.
This means that the crypto investors try to take the profits during the end of each of these cycles.
They wait till the market experiences a bear run once again when the prices of the assets fall and they buy the assets back.
Most crypto investors are well aware of the fact that continual printing of fiat currencies by the central banks all over the world result in inflation.
It is for this specific reason that they do not want to hold their profits in cash so that they do not have to bear the brunt of inflation.
One of the good alternatives is to invest in some assets that will produce significant and continual income.
One such alternative investment option is in the real estate market.
It is good because the investors can use the cash flow they obtain from the property as profit to buy more crypto coins when the crypto market returns to favorable conditions.
New Altcoins
In the crypto world, there are not only Bitcoin millionaires but there are several investors who have made millions from the Altcoins, especially the new ones.
One good example is Dogecoin. This meme crypto experienced an enormous rise in its price after it drew the attention of the owner of Tesla, Elon Musk.
This coin was particularly created as a joke currency initially and featured the Doge meme, the image of a Shiba Inu dog.
This particular crypto token, much unlike Bitcoin, does not have a finite supply because it was never created with an intention to have a significant store of value.
However, the tweet of Elon Musk caused a real explosion in its price and many investors bought this coin.
Therefore, the humorous coin had turned those early investors into millionaires when they cashed them out for Bitcoin or for a fiat currency of their choice.
The same thing happened with the other smaller crypto coins that were created with much more serious intention.
All these alternatives to Bitcoin, (hence the name Altcoins) however suffer more severe crashes normally in comparison to the price of Bitcoin.
And, the most unfortunate thing is that the prices of these Altcoins never seem to recover down the lane.
Therefore, several newly made millionaires of Altcoins also look for an alternative place to invest their wealth so that they can generate some significant amount with a passive income.
Once again, investing in property apart from other potential crypto coins seems to be a more reliable vehicle to them that will enable them to earn a lot of money due to significant capital appreciation and increase in value.
Ideally, this offers them a suitable means to win over the effects of inflation as well.
Similarities
If you are still apprehensive about property to be a good alternative source of income and investment to Bitcoin, here are the similarities that you should know between them that will offer you a peace of mind.
Crypto and Bitcoin millionaires invest in property as an alternative to Bitcoin because they are almost the same in potential for growth and value appreciation with probably the only difference that Bitcoin is digital and property, on the other hand, is physical.
And yes, Bitcoin investment is a new concept as compared to property investments which were there since the beginning of civilization and will probably be there till the end of it, if ever it happens though.
As for the similarities between the two, there is a limit to their supply and there is a huge and growing demand for both.
As said earlier, Bitcoin has a supply limit of up to 21 million coins by its code and the property is limited by the quantity of land accessible.
The population of every country is increasing day by day and added to that the immigrants in the Western nations are resulting in an increase in the demand for property creating a scarcity of it and hence a steep rise in prices.
The investor thesis of Bitcoin is therefore pretty similar to that or property due to these particular similarities between these two asset classes.
This is what encourages a lot of crypto millionaires to move the newly acquired part of their crypto holdings into property and buy them back later on during favorable conditions from the profits earned from property.
This enables them to create a hedge against the fall in prices of the crypto assets.
Therefore, it is always good and productive to invest and hold an asset like property that will produce a steady cash flow.
This way you will have a continuing income which you can invest back in crypto.
And, most importantly, all the time you will be assured of a more reliable income from an asset that is much less volatile in comparison to Bitcoin and other crypto coins.
Therefore, it can be concluded that if you want to deal effectively and comprehensively with the volatile nature of the crypto assets and the market, it is extremely important for you to know the alternative things that you can invest in as well.
You may focus on other crypto coins and Altcoins if you are well aware of the market behavior and have a lot of expertise gained over the years you have been trading there.
Otherwise, if you are unsure how exactly you can spread the risks among different asset classes in a crypto market, you can reliably and confidently invest in real estate.
This will guarantee a more constant and a reasonably high return on your investment.
However, before you invest in any alternative assets class, property in particular, make sure that you research well and do your due diligence.
It is essential to have the relevant and necessary knowledge and correct training before you start with a new type of investment in a new asset class.
There may be a lot of pitfalls in it that you should know about and need to avoid.
It is only through proper and thorough research you will acquire such knowledge and be able to find the perfect way to diversify your crypto portfolio and make a significant amount of profits.
Conclusion
Diversifying the crypto portfolio is the best way to minimize losses and the risks. Whether you already are a millionaire or an aspiring one, you must know exactly how to do that and go ahead with it.
Thanks to this article, now you know about it all.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.
