Cryptocurrency investing comes with great potential rewards, but also great risks. As with any investment, spreading out your risk by diversifying is wise. Here are some creative ways to diversify your crypto portfolio beyond just buying coins and tokens.
Try Index Funds and Crypto ETFs
A straightforward way to diversify your cryptocurrency portfolio is to invest in a crypto index fund or ETF (exchange-traded fund). These provide exposure to a basket of cryptocurrencies.
For example, the Bitwise 10 Crypto Index Fund holds the top 10 cryptocurrencies weighted by market capitalization. This gives broad diversified exposure to the overall crypto market.
There are also thematic crypto ETFs focusing on areas like DeFi, NFTs, and the metaverse. These allow targeting specific sectors while still providing diversification.
Pros
- Instant diversification into many cryptocurrencies
- Professionally managed
- Lower volatility than individual coins
- Easy to buy like stocks
Cons
- Higher fees than buying coins yourself
- Less potential upside than individual coins
Venture Into Altcoins
Altcoins refer to cryptocurrencies other than the major ones like Bitcoin and Ethereum. There are now over 10,000 different altcoins to choose from.
While risky, buying a judiciously selected basket of altcoins can provide huge upside. Finding the next Solana, Avalanche or Dogecoin early can multiply your investment 10x or more.
Focus on altcoins solving real-world problems or enabling new use cases, not just generic clones. Pay attention to the team, community and traction.
Ideal Altcoin Traits
- Strong, experienced founding team
- Innovative technology or use case
- Clear roadmap and regular development updates
- Growing ecosystem of apps/users
- Attractive tokenomics
Spread bets over several promising altcoins to mitigate risk. Consider taking partial profits on big runs and rebalancing your altcoin portfolio over time.
Invest in Crypto Companies
Investing in public companies operating in the cryptocurrency sector provides indirect exposure to crypto without buying coins directly.
Major types of crypto companies:
- Platforms like Altrix Edge and Binance
- Miners like Marathon and Riot Blockchain
- Financial services like Silvergate and Galaxy Digital
- Hardware infrastructure like Nvidia and Advanced Micro Devices
You can buy stocks, options, futures, ETFs or mutual funds holding these companies.
Benefits
- Regulated stock market investing
- Lower risk than buying tokens directly
- Gain exposure to crypto ecosystem growth
Drawbacks
- Indirect exposure to cryptocurrencies
- Subject to mainstream financial market risk
- Lower upside than owning coins
Explore Early Stage Investing
Investing in cryptocurrency projects at the earliest stages is extremely high risk but presents massive upside potential. Two options here are:
IDOs
IDO stands for Initial DEX Offering. New cryptocurrencies sometimes conduct IDOs before listing on exchanges. Participants buy the new tokens directly from the project teams. IDOs allow getting in early before the crypto hits exchanges.
- High reward potential if project succeeds
- Early access to hot new projects
- Must research teams, tech, roadmaps thoroughly
- High risk of failure
Equity Investments
Some crypto companies raise funding by selling equity stakes, like traditional startups. Investors can buy shares in the companies developing new crypto projects.
- Gain exposure to crypto without buying tokens
- Benefit from success of platforms/infrastructure
- Requires accreditation and angel investing experience
- Long lockup periods on investments
This is an advanced option, but investing in crypto companies can diversity a portfolio beyond just holding tokens.
Lend Your Assets
Lending cryptocurrencies can generate attractive interest income while also diversifying risk. Many platforms like Compound, Aave and Celsius offer crypto lending programs.
The basic process is:
- Deposit crypto assets as collateral
- Borrow stablecoins or other assets against your collateral
- Earn interest on your deposits
Pros:
- Earn 8-12% APY interest on deposits
- Take loans against your crypto without selling
- Keep your crypto investments while diversifying into stablecoins to hedge risk
Cons:
- There is smart contract and platform risk
- Interest rates fluctuate based on market conditions
Be sure to research lending platforms thoroughly and do not over-leverage with loans. Used prudently, crypto lending can provide a nice low-risk return.
Tap Crypto Derivatives
Cryptocurrency derivatives provide advanced ways to diversify risk and hedge your portfolio:
Futures
A futures contract allows buying or selling an asset at a predetermined future date and price. Crypto futures trade on exchanges like FTX, Deribit and OKEx.
Benefits:
- Hedge portfolio risk
- Speculate on crypto prices without owning them
- up to 100x leverage (very risky)
Options
Options give you the right, but not the obligation, to buy (call) or sell (put) the underlying asset at a set strike price on the expiry date.
Benefits:
- Define maximum risk upfront
- Protect long positions against price declines
- Speculate on volatility
Perpetual Swaps
Perpetual swaps are futures without expiry dates. They track the spot price rather than settling at expiry.
Benefits:
- No need to roll contracts
- Up to 100x leverage possible
- Lower fees than futures in many cases
Use derivatives strictly for hedging or diversification, not speculation, as the leverage involved amps up risk massively.
Tap Into Tokenized Assets
Tokenization means representing real-world assets like real estate, commodities, art and more on blockchains. Investing in tokenized assets provides indirect crypto exposure diversified beyond just coins and tokens.
Here are some major asset classes getting tokenized:
- Real estate – Platforms like RealT and AssetBlock allow buying tokenized fractional shares of properties.
- Commodities – Tokenized gold, silver, oil and gas give exposure to commodity prices.
- Art – NFT platforms like SuperRare tokenzie artworks. NFT funds like Metapurse invest in curated NFT collections.
- Sports memorabilia – Platforms like NBA Top Shot tokenize collectible basketball moments.
- Equities – Platforms like DX.Exchange tokenizes stocks like Apple and Tesla on Ethereum.
- VC funds – Startup platforms like Republic tokenize venture capital funds for broader investor access.
Tokenized assets unlock entirely new liquid investment opportunities. As with any emerging technology, evaluate risks and lockup periods carefully.
Bonus: Hold Stablecoins
Though not a diversification technique per se, holding some stablecoins as part of your crypto portfolio can reduce risk. Fiat-pegged stablecoins like USDC, USDT and BUSD have minimal volatility, unlike highly volatile coins and tokens.
Stablecoins allow taking shelter in bad market conditions without exiting crypto entirely. They also provide liquidity for trading, lending and more.
Downsides are vulnerability to losing the fiat peg and platform risk of issuers like Circle and Binance. But stablecoins are worth considering to balance a crypto portfolio.
Key Takeaways
Diversifying your cryptocurrency portfolio beyond direct coin and token holdings has many benefits:
- Mitigates risk by reducing exposure to individual assets
- Gains exposure to different parts of the crypto ecosystem
- Smooths out volatility by balancing asset types
- Unlocks greater liquidity via lending and derivatives
- Provides indirect exposure options without buying coins directly
On top of holding a diverse mix of digital tokens, consider funds, early stage investments, lending strategies, derivatives, crypto companies, tokenized assets and stablecoins.
Crafting a strategically diversified crypto portfolio takes more work but can really pay off over the long term. The potential to magnify gains while minimizing risk is well worth the effort.