Asset diversification is a strategy investors use with the purpose of increasing long-term gains and minimising risk. It involves the creation of a diverse portfolio, including a variety of preferably uncorrelated assets.
This strategy is even more important when it comes to investing in cryptocurrencies, given their high volatility and increasingly high variety.
Benefits of coin diversification
There are three main benefits to this investment approach:
- Higher potential gains in the long run
- Minimising risk
- Protection against volatility
Higher potential gains
Each coin has at least some potential for its price to grow, and the number of coins available is rising. With the exact price movements being impossible to predict, investing in a higher number of coins increases the likelihood of encompassing some that will bring a high profit. That is not to say that one should try to incorporate all coins into their portfolio. Researching individual cryptocurrencies and how their prices change over time is an essential tool for making informed decisions. The best crypto to buy in December 2025 will include classic coins such as Bitcoin and Ether, along with some new coins with innovative features. Many investors often also include stablecoins for their low volatility.
Risk minimisation
This is the primary purpose of coin diversification, but also of asset diversification in general. The idea is that the potential negative performance of some coins will be offset by the positive performance of others. For this to work, it is essential for the prices of coins not to be correlated, in other words, that the prices do not change in sync with each other.
Protection against volatility
Cryptocurrencies are more volatile than traditional assets, making their price movement harder to predict. While this can sometimes work to the advantage of investors (during sharp price increases), it is generally considered a drawback.
Diversification has a dampening effect in the case of certain coins experiencing especially high degrees of volatility, as it will be compensated by the lower volatility of other coins. This is a similar phenomenon to the previously mentioned effect of lowering risk.
Investors particularly worried about volatility can add a greater amount of stablecoins to their portfolio. These are coins that are pegged to other assets, most commonly fiat currencies, which exhibit lower price fluctuations than cryptocurrencies.
Implementing diversification
When investing in crypto, there are certain principles that should be followed in order to make the most out of diversification.
Diversifying across sectors
Cryptocurrencies serve a variety of purposes, and each sector (e.g., DeFi, NFTs, AI, etc.) has coins that are associated with it. By spreading investments across a range of sectors and coins with different use cases, one ensures they will take advantage of developments in any of these areas.
Assessing risk tolerance
This involves assessing the potential losses one can handle and deciding on the goals of their investment, mainly whether they are looking for long-term growth or short-term profit. An investor with a higher risk tolerance can potentially increase their short-term gains by investing in more volatile assets like memecoins and altcoins.
Choosing non-correlated coins
Asset correlation is a measure of how the prices of two assets move relative to each other. It can be numerically represented as a value between -1 and 1, with -1 indicating perfect negative correlation and 1 indicating perfect positive correlation. Two assets being positively correlated means that the change in one’s price will be followed by the change in the other’s in the same direction. Zero correlation means the two assets’ prices move independently.
Cryptocurrencies are rarely negatively correlated, and investing in multiple coins that are all mutually positively correlated effectively defeats the purpose of diversification, as it eliminates the compensating effects leading to the lowering of risk.
Portfolio rebalancing
Portfolio rebalancing is the adjustment of a portfolio by means of selling certain coins and buying additional quantities of others or buying new coins not yet represented in the portfolio. The purpose is the adaptation of the portfolio to shifting market performance, maintaining diversification, and keeping the portfolio aligned with set goals.
Conclusion
The diversification of assets is a strategy that has been used by investors for a long time, yet its importance is even higher in the case of crypto investments due to their unique nature. If implemented correctly, diversification allows investors to make the most of their invested funds and minimise the risk of suffering high losses.
