When it comes to the alt coin market, I see a lot of new crypto investors confusing the concept of diversification with what I would call the “shotgun approach” which is term I first heard when listening to billionaire investor Peter Thiel explain investing pitfalls. The shotgun approach is simply spreading your money around a bunch of different alt coins in the hope that one of them will give you those huge gains. The thinking here is that the more money you have spread into different coins, the more chances of picking a winner, sort of like buying more lottery tickets to increase your odds of winning. But this isn’t diversification at all, it’s simply a random betting strategy and no successful trader uses this approach.

When you diversify your investments, the purpose is to minimize your risk, and to give yourself some exposure to more opportunities. It is not simply spreading your money around hoping some random investments hits. For example, in traditional investing, you may have some money in stocks, some in gold, some in real estate, and some in other assets. The purpose of this is that you have some protection if the stock market has a big correction and you only held stocks. If the economy slows you have some protection against that as well. But you also expose yourself to more opportunities. For example, if real estate takes off, you have some investments there so you can benefit as opposed to if you were just 100% into stocks. This may seem obvious, but it’s a difference most new investors miss when picking out their portfolio and trying to spread their money around the most effectivly.

So how does this apply to crytpo. First off all, you may want to break down the different coins into different groups. For example:

Currency Coins – These are coins that are strictly currency or store of value coins. They include Bitcoin, Litecoin, Monero, etc.

Technology Coins – These are coins that are based on some technological goal. They may include things like Iota, Modum, etc.

Utility Coins – These coins serve a purpose. So coins like Civic or Ark.

This is just a quick breakdown and you can break the coins differently if you like. But the key point is to see what coins give you diversification and which ones don’t.

So for example, owning Bitcoin and Litecoin would not add much diversification to your portfolio. They are generally the same, and your risk is not really reduced, nor is your reward made better by owning these two. You can still own these two coins in the same portfolio, but it does not add any real diversification. So generally in this scenario, you would want to pick one, and usually its the “best of breed” choice, which would be Bitcoin.

Now, if you wanted to diversify to increase your exposure to opportunities outside of the currency coins, you would want to add one of the technology coins to your Bitcoin portfolio. Another option would be choose something like Ethereum as a diversification to Bitcoin. Most alt coins are built on Ethereum, so simply owning Ethereum diversifies your account by giving you some exposure to the tech side of crypto without having to own specific alt coins. This may seem obvious, but most investors simply choose Bitcoin and Ethereum because they are the top two coins, but they don’t really realize the way it increases their diversification. It’s an important distinction so make sure when choosing your coins, each one offers a hedge to another coin your own, but also gives you some exposure to what could be a fast moving sector. Whatever you pick must fill those two criteria for effective diversification. For example, a lot of people say to simply a buy a few of the top 10 coins but once again this is just a shotgun approach. You want to pick the coins that compliment each other to give you most opportunity and least risk.

So in the end, the point of diversification isn’t to simply spread your money around. It’s a logical process that reduces redundancy in your portfolio, redundancy which can increases risk. And also to add some exposure to possible break-out sectors without having pick the right “lottery ticket” investment.