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 cryptocurrency is an incredibly noisy space — and quite often people get confused about where to start. So let's start by talking about portfolios.
With thousands of new tokens flooding the crypto space every day, it’s often difficult to determine which ones are worth investing in and which aren’t. The current bear market and all the previous ones have taught us one thing: balance is key. Like any other traditional finance portfolio, it’s important to diversify. Think of it as a buffet where you pick and choose from a variety of dishes to suit your tastes.
When you hear the word “cryptocurrency,” you usually think of Bitcoin or Ethereum, probably because they make headlines every day. But it doesn’t stop there — to diversify your cryptocurrency, you need to know about 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 by market capitalization. Since its inception in 2008, BTC has performed exceptionally well both as a cryptocurrency and as an investment. This explains the participation and interest of both retail and institutional investors. It is well suited to the broader macroeconomic climate, has deflationary tendencies, and has a first-mover advantage, meaning that other cryptocurrencies tend to follow BTC’s price trends.
We all know that the 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-one protocol, a term used to describe any decentralized, open-source blockchain on top of which various applications can be built. Layer-one tokens like ETH are a good first step to getting into the cryptocurrency world and diversifying your portfolio away from just BTC. Some popular examples include 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’ll 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’re lost trying to understand the differences between their tokens as investments.
After Layer 1 comes Layer 2. Layer 2 solutions are created to do some of the heavy lifting for Layer 1, helping them scale by improving security, scalability, or decentralization. Layer 2 solutions are relatively infantile compared to giants like Bitcoin and Ethereum, but many have shown accelerated growth despite their limited lifespan. A prime example is Polygon (MATIC), the #1 Layer 2 token of all time. It is designed to help improve Ethereum, allowing developers using the network to build cheaper and faster solutions. Layer 2 tokens are what will allow existing Layer 1 cryptocurrencies to scale, helping them increase in size, security, and efficiency. This type of technology shows great potential in helping blockchain technology eventually achieve mainstream adoption, and their tokens will likely reflect that 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 quickly thanks to the emergence of promising projects. And each DeFi project typically launches its own unique token with unique functionality and name. DeFi tokens are typically digital utility tokens used, for example, to conduct financial transactions or participate 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 your crypto portfolio comes with risk. DeFi in particular is still somewhat of a newborn. But why are DeFi tokens worth investing in? They are the ones that will drive mass adoption of cryptocurrencies in general and provide real-world use cases that build confidence in the technology we’ve discussed so far.
NFT
The biggest buzzword of the last two years: NFTs. Lately, we’ve seen some of the world’s largest corporations and institutions enter the NFT space. NFTs, short for Non-Fungible Tokens, are digital assets that represent real-world objects like art, music, and even community memberships. The best part? They’re entirely code-driven, meaning you “actually” own what you own. This has big implications for digital ownership.
If you’re looking to add a little variety to your crypto portfolio, consider NFTs. It’s important to note, however, that their nature and pricing are even more speculative than cryptocurrencies. However, numerous projects have already made great strides with NFTs, and they’re another way the crypto space is expanding its reach to real-world use cases. I’m sure we’ve all heard about the infamous success of NFT collections like CryptoPunks, Bored Ape Yacht Club, and Moonbirds, which have seen incredible success. NFTs are a great way to diversify your portfolio and get exposure to the next trend in the crypto 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.
The metaverse is a broad term that refers to virtually any virtual reality world with collective and collaborative activity. Metaverse tokens overlap somewhat with GameFi tokens, 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 that host their own virtual worlds. Popular metaverse tokens include ApeCoin (APE), Sandbox (SAND), Decentraland (MANA) and Axie Infinity (AXIE).
With the metaverse 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 represents the intersection of gaming and DeFi, has also proven relatively resilient to the overall bear market conditions, with “$2022 billion” pouring into blockchain games in the first quarter of 2,5 alone. The metaverse and GameFi show huge potential to be game-changers for the crypto space – not only are they scaling on their own, but they are also starting to reach different sectors of the broader economy, eventually leading to retail adoption. If you believe in blockchain technology and are looking to diversify your portfolio, this is a cryptocurrency to consider.
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.