How Cryptos Help with Portfolio Diversification

The Dow Jones Industrial Average dropped by around 1,300 points in just two days in October 2018. It represented a loss of over 5% for traders. Diversification of your investment portfolio is crucial to minimising risks during such market crashes. Diversification should be such that any decline in one investment is ideally counteracted by another. This way, when one market crashes, you are protected against losing all your investments at once.

We described the tips which are crucial to know if you are trading cryptos, feel free to read about them here.

The cryptocurrency market is not affected by the same factors as other financial markets are. While geopolitical and economic developments influence the movements of most financial markets, cryptocurrency prices are more impacted by the laws of supply and demand, marker rumours and expectations, specific crypto and blockchain news.

Here’s a look at some of the significant advantages cryptocurrencies offer as a means of portfolio diversification.

Portfolio Diversification with Cryptocurrency

When using cryptocurrency to diversify your portfolio, the first thing you should know is that there are three categories across which you can invest – the cryptocurrencies themselves, the platform (such as ETH, NEO, ADA) and utility tokens (altcoins used for specific blockchain applications).

However, before you choose where to invest, it is useful to know if this investment will help your portfolio.

Near Zero Correlation

Correlation plays an important role when choosing assets for diversification, to minimise the effect of price fluctuations. Cryptocurrencies are found to have a near zero average correlation with other assets over time, especially traditional hedging instruments like bonds, commodity indices, forex, equity and such alike. They are not regulated directly by any government or institution, making them wholly independent from other systems.

Hedging against a Central Bank Bubble

Traditionally, central banks of countries were the “lender of last resort.” However, with changing monetary policies, they have become the “buyer of the first instance.” A lot of traditional bankers and analysts have pointed out that bonds and stock markets are in a price bubble and when this bubble bursts, it could lead to massive losses. As a safety measure for such an eventuality, cryptos could be the most suitable diversification option.

Security

Transactions using blockchain technology are secure although some existing limitations are yet to be overcome. Theoretically, the blockchain system and cryptocurrencies based on it are permanent, rigid, and unhackable. Therefore, investors don’t have to worry about scams and hacking that will lead them to lose an investment.

Potential

Centralisation and changing regulations have affected markets across the world. Cryptocurrencies are decentralised and not directly regulated by financial institutions or governments. They offer vast potential also because they are still in a nascent stage of being adopted into the mainstream.

It is a good idea to balance your portfolio by investing in different types of assets, including cryptocurrencies. However, it is essential to choose the crypto exchange carefully. We`ve covered this subject in our previous article.

IronX is an upcoming crypto exchange that is the result of a collaboration between IronFX Group, an award-winning global online trading platform with connections to top-tier financial institutions, and EmurgoHK Group, the creators of Cardano. IronX Exchange is regulated by the Estonian Financial Intelligence Unit and IRX Smart Contracts are already security audited by the leaders in blockchain security, Hosho and Hacken. The 24/7 multilingual support is one more essential option to ensure your trading satisfaction.

Reminding you that IronX has launched a special Black Friday and Cyber Monday Promotion that allows you to receive a bonus to any contribution made until 26.11.2018, more information available here.