Why you need to diversify your crypto portfolio ASAP

By Pavel Cherkashin

Though some people still believe that Bitcoin has a great potential to grow in price, it is clearly losing its dominance. Should Bitcoin remain technologically the same, there is a good chance it will be driven from the market by new and more technologically advanced cryptocurrencies in the next few years.

It is impossible to predict now whether Bitcoin investors are going to lose or win over time. But one thing is clear: It is a highly risky investment. Does it mean you need to sell your Bitcoins right away? Not necessarily. But it’s wise to make sure it is not your only bet.

Bitcoin is the gold standard, but how long will it stay that way?

The cryptocurrency market is at an early stage in its development, so there is no perfect currency now. Bitcoin was a pioneer on the market and still remains the gold standard and the reserve currency, but things are about to change. Bitcoin faces several major challenges right now:

· Technical issues. Bitcoin is characterized by a slow network that can support just 7 transactions per second max; code deficiencies that do not allow certain operations such as smart contracts; and security issues (which apply to all existing cryptocurrencies).

· Economic issues. The value of Bitcoin is speculative. Because of the high volatility, using it as a means of payment (basically, as a currency) doesn’t make sense, so instead it serves as a tool to enter or exit the market. For this reason, the volume of Bitcoin transactions over the past few years was almost steady. If the volume were to increase significantly, the network would not be able to support it.

These issues come down to one: Bitcoin already can’t compete with new, specialized and more technologically advanced altcoins, which have been taking over the maturing market and promoting blockchain technology to various market verticals. The fierce competition between Bitcoin and altcoins, and among the various altcoins themselves, will result in new market leaders and make weak currencies disappear.

How can anyone identify value in the wild cryptocurrency market?

The crypto market is booming. There are now more than 1,600 cryptocurrencies on the market; in January of 2017, there were only about 600. All of those cryptocurrencies, not just Bitcoin, face serious challenges, such as security. On top of that, the market is flooded with unviable projects and scams.

In this imperfect world, how do we identify value?

I believe that it is not cryptocurrencies themselves that will hold the most value in the near future; rather it will be the leading applications in various industries and technologically advanced protocols that offer innovative capabilities. Already, protocols such as EOS, Hashgraph and Ethereum are strong competitors to Bitcoin. All they need to do to replace Bitcoin is prove their reliability to the market; if they do, and Bitcoin doesn’t change technologically, Bitcoin will be gone in three years.

When investing in new markets, learn from the traditional markets

So what should individual investors do if they lack deep knowledge about the market and the skills to properly evaluate available crypto assets, but they still want to participate in this nascent market? The more important question is, how can you do so with less risk, even though the market is wild, super volatile and unpredictable, and results are never guaranteed?

Let’s take a step back and look at what has been the best investment tool on the traditional financial markets in terms of risks and returns — the index. The traditional index investment strategy is one of the most important financial innovations of the 20th century, enabling long-term, passive investment in a broad portfolio of companies. Since index funds do not depend on the success of any one entity, investors can profit even if certain assets in the portfolio do not perform well. And a long-term strategy tends to show better results, even though the market might be crashing during certain short periods of time.

Historically, investing in index funds such as the S&P 500 has been the easiest and safest way to profit. The strategy has proven to be more successful than actively managed investment strategies due to following factors:

· Diversification, which lowers the volatility of a portfolio and the risks associated with individual assets

· Efficiency, which results from a purely mathematical approach to investments, rather than guesses, speculations and emotions

· Transparency, which stems from a rules-based approach that eliminates manipulation

Just as an index strategy minimizes risks and maximizes returns on the traditional markets, it can do the same on the crypto market. This logic explains why index crypto funds are the latest trend on the market. They offer their services to both experienced and novice investors, making crypto investments easier. Though funds eliminate the need to research each asset in the portfolio, I recommend that investors take the time to learn how the fund justifies its selection of crypto assets and their number in the portfolio.