The numbers don't lie. FROM 1,7 billion in 2013 to trillions today, the cryptocurrency market has experienced a meteoric rise that would be unimaginable for any other asset class. And over the years, more people are looking for ways to get into the hottest new asset class.
But cryptocurrencies are an extremely noisy space - and quite often people get confused about where they should start. So let's start by talking about portfolios.
With thousands of new tokens flooding the crypto space every day, it's usually hard to tell which are worth investing and which aren't. The current bear market and all previous ones have taught us one thing: balance is the key. Like any other traditional finance portfolio, it is important to diversify. Think of it like a smorgasbord, where you choose pieces from a range of dishes to your liking.
When you hear the word “cryptocurrency”, you usually think of Bitcoin or Ethereum, probably because they make headlines on a daily basis. But this is not the end of the matter – in order to diversify cryptocurrencies, you need to be aware of the different types of cryptocurrencies on the market.
5 ways to diversify your cryptocurrency portfolio:
Bitcoin
Solutions of the first and second level
DeFi
NFTs
Metaverse & GameFi
Standard: Bitcoin
Unless you live in a cave, you have definitely heard of bitcoin. It was he who gave birth to this whole concept of a decentralized, borderless and peer-to-peer financial crypto-ecosystem. Hence its popularity and fame. If you are stuck on the question of where to start investing in cryptocurrencies, then Bitcoin is probably a good place to start.
Bitcoin (BTC) is the king of cryptocurrencies, ranking first in terms of market capitalization. Since its inception in 2008, BTC has shown outstanding results both as a cryptocurrency and as an investment. This explains the involvement and interest of both retail and institutional investors. It is well-suited to the broader macroeconomic climate, has deflationary tendencies, and has a first-player advantage, meaning other cryptocurrencies usually follow BTC price trends.
We all know that crypto markets are extremely volatile, but if you are looking for a “relatively” safer and more stable option in the crypto space to diversify your portfolio, BTC is your first stop.
Explanation of decisions of the first and second levels
The birth of Bitcoin led to the expansion of blockchain technology and there are now many alternative blockchains. The most common alternative to BTC is Ethereum (ETH), introduced back in 2013.
ETH is an example of a layer XNUMX protocol, a term used to refer to any open source decentralized blockchain on which various applications can be built. Tier XNUMX tokens like ETH are a good first step to dive into the world of cryptocurrencies and start diversifying your portfolio away from just BTC. Some popular examples are Binance Smart Chain (BNB), Solana (SOL), and Avalanche (AVAX). It's important to note here that not all layer one protocols are the same - you need to learn about each protocol, its unique distinguishing features, the range of applications it supports, and its operational structure, such as consensus mechanisms. Keep this in mind if you get lost trying to figure out the difference between their tokens as an investment.
After the first level comes the second level. Tier XNUMX solutions are built to do some of the heavy lifting for Tier XNUMX, helping them scale up through increased security, scalability, or decentralization. “Layer XNUMX” solutions are quite infantile compared to giants like Bitcoin and Ethereum, but many of them have experienced accelerated growth despite their limited lifetimes. A notable example is Polygon (MATIC), the second-tier token ranked #XNUMX of all time. It aims to help improve Ethereum, allowing developers using the network to create cheaper and faster solutions. Tier XNUMX tokens are what will allow existing Tier XNUMX cryptocurrencies to scale, helping them grow in size, security, and efficiency. This type of technology shows great potential in helping blockchain technology eventually achieve mainstream adoption, and their tokens are likely to reflect this potential.
DeFi
But what do layers 1 and 2 mean without DeFi? Not so much. DeFi includes all decentralized applications (dApps) that are built on top of layers 1 and 2, so it's not just a technology, but a technology that can be used.
DeFi is scaling incredibly fast with promising projects emerging. And each DeFi project usually launches its own unique token with unique functionality and name. DeFi tokens are typically digital utility tokens used, for example, in conducting financial transactions or participating in DAOs, or “Decentralized Autonomous Organizations.”
If you believe in the cryptocurrency space and what it could mean for the future of our financial economy, DeFi is definitely worth learning about. It is a way to empower everyday investors to access asset types, lower their fees and raise their rates. Projects such as Compound, Maker, Aave и Uniswap, are among the most worthy examples.
Diversifying a portfolio of cryptocurrencies is associated with risk. Especially DeFi is still somewhat of a newborn. But why are DeFi tokens worth the investment? It is they who will drive the mainstream adoption of cryptocurrencies in general and provide real use cases that build trust in the technology we have discussed so far.
NFT
The loudest word of the last two years: NFT. Recently, we have seen some of the world's largest corporations and institutions enter the NFT space. NFTs, short for Non-Fungible Tokens, are digital assets that are real objects like art, music, and even community memberships. What is the most interesting? They are completely code-driven, meaning you “really” own what you own. This has big implications for digital ownership.
If you want to diversify your portfolio of cryptocurrencies a little, take a look at NFTs. It is important to note, however, that their nature and pricing is even more speculative than cryptocurrencies. However, numerous projects have already gone far with NFTs, and this is another way that the cryptocurrency space is expanding the possibilities for real-world use cases. I'm sure we've all heard of the infamous success of NFT collections such as CryptoPunks, Bored Ape Yacht Club and Moonbirds, who have been incredibly successful. NFTs are a great way to diversify your portfolio and get access to the next trend in the cryptocurrency space.
In addition, you can diversify your portfolio with tokens that serve as useful tokens for NFT marketplaces if you want to access NFT as a sector, but not necessarily hold assets from separate collections.
Metaverse & GameFi
And finally, the main characters of 2022: Metaverse and GameFi. These two characters are merged into one section as most GameFi tokens are also considered metaverse tokens.
Metaverse is a fairly broad term that refers to almost any virtual reality world with collective and collaborative activities. Metaverse tokens overlap with GameFi tokens to some extent, as all GameFi platforms have their own unique metaverse. In a broad sense, the metaverse can also encompass other organizations in the crypto space such as DAOs and infrastructure providers hosting their own virtual worlds. Popular metaverse tokens include ApeCoin (APE), Sandbox (SAND), Decentraland (MANA) and Axie Infinity (AXIE).
Since the Metaverse is projected to grow to $2030 trillion by 1,8, Metaverse tokens are worth considering when considering the different types of tokens you can use to diversify your portfolio. GameFi, which is the intersection of games and DeFi, has also proven to be relatively resilient to general bear market conditions, with “$2022 billion” poured into blockchain games in the first quarter of 2,5 alone. The Metaverse and GameFi are showing huge game-changing potential for the cryptocurrency space – not only are they scaling on their own, but are starting to span across sectors of the broader economy, eventually leading to retail adoption. If you believe in blockchain technology and want to diversify your portfolio, pay attention to this type of cryptocurrency.
Diversified exposure
We have considered only a small part of the entire crypto ecosystem and its various tokens.
But before you do, remember the general lesson: don't put all your eggs in one basket. The collapse of projects like Terra is clear evidence of why you should always diversify your portfolio. This is a great way to eliminate the overall risk of your portfolio and become familiar with the broader range of technologies and projects contributing to the decentralization initiative.