The idea that diversification is inherently good for your portfolio is deeply rooted in financial theory and is backed by empirical evidence. Diversification here means holding a sufficiently diverse portfolio of assets — let’s say stocks. The lower the correlation, the more your stock portfolio can weather the storm. On a macro level, portfolios look for the same low correlation amongst asset classes to achieve a measure of insulation.
As humans replicate what they know, no wonder this idea branched itself from traditional finance to the world of Crypto. However, in my humble opinion, I do not see how an industry as nascent as Crypto can really have diversification from a holdings-based perspective alone.
Take the latest downtrend in the market with the FTX / Alameda collapse or go back to the contagion starting with Terra-Luna. The whole market has been bleeding & there are no sub-sectors that are insulated by virtue of having no exposure to the bankrupt entities or being otherwise important to the functioning of the ecosystem as a whole.
Run through the past 5 years of pricing data & you will see that when $BTC rises, so does the rest of the market. When it falls, the rest of the market follows. Similarly, Ethereum & Solana as the two prominent blockchains hosting the bulk of the ecosystem don’t hold their ground in times of crises & is not as if DeFi protocols report higher TVL when $BTC is nosediving or Oracles have no price impact because hey everyone uses them & they are so essential!
The central idea here is that the Crypto market is not the stock market and finding a diversification benefit on holdings alone is not an effective strategy. The reason is that, at least as of today, the correlation between $BTC and the ALT market is considerably high plus the outsiders’ view looking in is that all of these coins are the same. Crypto is judged as a collective space instead of each coin/project being judged on its own merit and role in the ecosystem.
So what can you, as an investor in the Crypto market, do to overcome this challenge? I believe the answer lies in not just diversifying amongst holdings but also diversifying amongst managers. I put forward two reasons in support of this solution:
- Having a healthy ratio of $BTC to ALT in your portfolio is essential as we see that ALT market gains are higher than $BTC gains. In financial terminology, this implies that as with a strong positive correlation leading to a potentially higher drawdown than $BTC, ALTs also have the opportunity for a higher return. So you shouldn’t necessarily miss this opportunity.
- Diversifying across managers allows you to essentially pick up alpha by virtue of different strategies that each manager may have. If you trade alone for yourself, you benefit only from your own skill level & knowledge and are exposed to your own behavioral and emotional bais. On the other hand, when diversifying your portfolio amongst managers, you benefit with more skill & knowledge at your disposal plus a diversified behavioral and emotional pool.
While there are many platforms out there, I personally recommend Zignaly for the sole reason that they have a solution that is goal congruent. Specifically, most managers out there would like to charge you a base fee regardless of the trading performance/outcomes. This means that you end up paying for people actually losing your money.
Zignaly, on the other hand, has a profit-sharing mechanism. Your manager, called a service provider, is an expert trader who puts up his own capital and you are essentially co-investing with him. If he turns a profit, he charges you a success fee. If he makes a loss, you don’t pay anything and he loses the same as you as a co-investor.
Are you interested in Zignaly’s profit-sharing service? Come on in and sign up at this link. The best part? No minimum amount to get started!
The other thing I like at Zignaly is the fact that they have a large base of expert traders (150+) attacking different strategies. Green Lion Social Capital, for example, trades Binance ETFs whereas Trade for Impact runs 12 services each focused on a separate major coin.
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The Crypto market is truly a market like no other and I believe that this is an opportunity of a lifetime. Don’t miss this opportunity by bringing your conventional ideas to the game. The key here is improvising & as we, sooner or later get over the current contagion, it is best to be prepared so that we take advantage.
Disclaimer: The views presented in the post are the personal opinion of the author & do not represent that of his employer nor are financial advice. Please do your own research before investing in or using any product mentioned in the post. The author may or may not be invested in any particular product.
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