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Crypto portfolio diversification: Everything is not good

By September 9, 2022No Comments

The advantages of digital currency diversification are reduced rewards and returns, increased chances of scams, volatility rates an issue, less significant assets can be a problem, and finally, the value falls. There are many disadvantages to using digital currencies as part of your diversification strategy.

The most significant one is that you reduce the returns on your investments by diversifying your asset allocation across various digital currencies (or other assets). In other words, if you had $100,000 in stocks and bonds and only $10,000 in digital currencies, you would have an 80% allocation to stocks and 20% allocation to bonds.

This would mean that you would receive 80% of the return from stock investments while receiving only 20% of the bond recovery. However, if both stocks and bonds had an average annual return of 8%, then the 8% yearly return on each asset type would result in an overall 10% annual return for your portfolio. So, jump into highly proclaimed crypto investments with the the most platform. 


1. Reduced rewards and returns

The first disadvantage of diversification is that you will not receive as many rewards or returns for your investments as you would if you held only one type of currency.

For example, suppose you have invested in Bitcoin and Ethereum when a significant price increase occurs in either one of these cryptocurrencies. In that case, you will experience a more substantial percentage increase than if all of your investments were in Bitcoin or Ethereum alone.

The main disadvantage of using virtual currency is that it reduces your rewards and returns. This is because a portion of the money you put into the virtual currency can never be converted back into cash, which means you will have less money to spend on other things. In addition, to make this work, you need to be more careful with your funds since real-world assets like gold or silver do not back them.

2. Increased chances of scams

Another disadvantage of virtual currencies is their increased chances of scams. This is because they are not regulated like traditional financial markets are and, therefore, are not as safe as they could be. This can lead to users losing their money if they do not follow all rules correctly or fall prey to fraudsters who assume this fact by pretending to be legitimate businesses offering services in exchange for money (such as paying for web hosting services).

Cryptocurrencies are still new and unregulated, so there are many risks associated with them—especially since they’re so unique that there aren’t many established rules or regulations on how they should be traded or used.

This means that people who want to scam others into buying their worthless digital currency (or not paying their bills when they owe money) can do so with relative ease because they won’t get caught before they’ve stolen someone’s money or identity.

Another disadvantage of diversification is the increased chance of scams being perpetrated on investors who hold multiple types of coins.

This risk is heightened because it may be challenging to know whether some coins are legitimate or not due to their lack of attention from the wider community; however, this also means that there may be opportunities for investors who are looking to use these currencies for illegal purposes such as money laundering or drug dealing (e.g., Silk Road).

3. Volatility rates are an issue 

Virtual currencies also tend to have high volatility rates, which may cause problems for investors who want stable prices that don’t change too often. The value of a cryptocurrency can go up or down over time, which means that you might not be able to cash out your earnings as quickly as you’d like.

For example, if you invest $1 in Bitcoin at the beginning of the month, but it falls by 25% in value over the month. You have lost half your investment—but if you had instead invested that same $1 in a savings account with compound interest, your investment would have grown by more than twice as much. 

Final words 

When cryptocurrency diversification is considered, it can be a controversial topic. However, there are many advantages to diversification and disadvantages to avoiding it.

Because cryptocurrencies are so volatile compared to traditional currencies like dollars or pounds sterling, it can be difficult for investors to determine whether or not their investments will rise.

Jerico Saquing

Jerico Saquing

Jerico is the founder of Peso Hacks. He's also a freelance writer who specializes in topics related to finance, travel and games. In his spare time, he likes to watch anime, play mobile games and read books.

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