Diversification is key for any successful investment portfolio. The reason you diversify your investments, is to limit your exposure to a single investment. If your portfolio solely consists of a single stock, then a downturn in the stock market would result in losses in your portfolio. Conversely, if your portfolio had been diversified between stocks AND bonds, your exposure and therefore your losses, would have been mitigated.
This concept has similarly been adapted for the cryptocurrency market. Instead of having a portfolio consisting of only Bitcoin, you should diversify into other cryptos such as: Ethereum, Litecoin and DASH, with the aim of limiting your exposure, if one cryptocurrency were to experience any losses. However, in this article, I intend to highlight the inefficacy of diversification in the cryptocurrency industry, and how an ICO is helping to change that.
The Diversification Illusion
Diversification is a system that is used to mitigate risk by dividing up investments into different asset classes and industries. The rationale behind diversification is this: In the likelihood of a single negative event, it is hoped that your investments would react differently, therefore limiting any potential losses to just a few investments.
Diversification is a principle that has seen success in more developed markets such as: Stocks and bonds. However, when applied to the cryptocurrency industry, it is simply not as effective. This is because, cryptocurrencies within cryptocurrency industry are all highly correlated. This simply means, cryptocurrencies tend to mimic each other in the way that they trend. When Bitcoin increases in value, it is likely that so too will Ethereum, Litecoin, Dash, Monero and all the other countless cryptocurrencies that exist within the space. On the other hand, when Bitcoin decreases in value, it is likely that, the other cryptocurrencies mentioned above will also decrease in value.
Over the same time period, you can see just how close to identical the larger cryptocurrencies by market capitalization: Bitcoin, Ethereum, DASH and Monero, appear to trend. It is this uncanny similarity that makes it incredibly difficult for the average investor to diversify his/her holdings responsibly.
However, this is not to say that diversification in the cryptocurrency industry is useless, quite the opposite, it is still very useful. For example, if Bitcoin were to experience a 15% loss in value in a single day, it is likely that the other cryptocurrencies would also experience a similar loss. However, they will experience this loss differently. Some cryptocurrency will end up losing more of their value than others, therefore, diversification will have helped in limiting this loss.
Instead, I argue, it is diversification into other industries, not just cryptocurrency, that will protect the average investor and therefore yield the best results. Diversification into other asset classes such as: Stocks, bonds and real estate will better protect an investor. However, these industries can often be difficult to navigate and therefore are not practical for a cryptocurrency investor. This is where ICOs can shine and help solve this problem by offering tokens that give a cryptocurrency investor the best of both worlds.
A Case Study: Caviar
Caviar is an ICO that solves the problem of diversification within the cryptocurrency space by giving investors access to the cryptocurrency market as well as the real estate market, all in one token. By combining investments in the cryptocurrency market, with the income generated from short-term loans, a Caviar token holder is able to properly minimize their risk by diversifying across two markets.
Token holders can enjoy the benefits of holding a Caviar token by receiving quarterly profits paid out via a smart contract from Caviar’s investment activities. Furthermore, users can also take advantage of any token value growth, providing an additional way in which users can profit from being a Caviar token holder.
Through the Caviar platform, the owner of a Caviar token can participate in the funding of real estate projects. Users can browse an approved range of different projects, pick the most promising one and earn a steady income upon completion of the project.
The positive 5-year track record behind the team at Caviar, means that the quality of professionals handling the investments is all that much higher. Caviar offers a serious solution to the diversification issue currently facing the cryptocurrency industry, and so it is a solution that must be taken seriously. If more tokens are able to follow Caviar’s lead by combining cryptocurrency and other asset classes, they stand to change the way in which we invest for the better.
You can check out the Caviar Project here.
Disclaimer: Mycryptopedia does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice.