How to Diversify Crypto Investments

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This article is reprinted with permission from NerdWallet. This article provides information for educational purposes. NerdWallet does not offer any advisory or brokerage services, nor does it recommend specific investments, including stocks, securities, or cryptocurrencies.

When it comes to investing, diversification is key. By spreading your wealth, you are less likely to suffer a major financial blow if one of your investments does not materialize.

This is especially true for cryptocurrency, an asset class so new and often volatile that some financial advisers are warning their clients to avoid it.

Jesse Proudman, chief executive of crypto investment platform Makara, said those interested in buying cryptocurrency could learn from wealthy “angel” investors. These buyers, who finance start-ups, are used to dealing with projects that may or may not succeed.

“When you’re an angel investor, you make a lot of different investments, and a lot of them fail, some of them have moderate success, and some of them are incredibly successful,” said Proudman. “It is this combination that makes your portfolio attractive. Diversifying here is smart for the same reason.

But the novelty of crypto makes diversification more complicated than it would be for more traditional investments, such as stocks. For example, there are no widely available mutual funds with broad exposure to the digital asset space.

Nonetheless, there are some strategies savvy investors can use to mitigate their risk.

Buy a fund

There are relatively slim choices for people with modest means who want the simplicity of a fund managed by professionals. But a handful of products have emerged that seek to make cryptocurrency more accessible to those most comfortable with traditional investment tools.

An exchange traded fund, for example, can be held in a brokerage account or used as part of a retirement fund, unlike crypto alone. But these funds also have fees and give investors less control over their digital assets.

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ETFs can be an easy way for investors to buy diversified portfolios of stocks and other assets.

As it stands, however, the Securities and Exchange Commission has not approved an ETF that holds Bitcoin BTCUSD, + 0.64%, or any that invests directly in other digital assets.

An ETF option for curious crypto investors is a fund that focuses on the underlying ‘blockchain’ technology of cryptocurrencies. These funds buy the shares of companies with an emphasis on this sector. These, however, are not direct investments in cryptocurrency.

The lack of fund options available in the digital asset market is primarily due to SEC skepticism.

See: Crypto exchanges “thought they could throw a fastball” by SEC, but law enforcement is coming, warn Chairs Gensler and Clayton

Sarah Milby, senior director of policy at the Blockchain Association, an industry group, said larger-scale funds were unlikely to debut until U.S. regulators became more comfortable with the markets for cryptocurrencies.

This fall, the first Bitcoin-linked ETF debuted on the New York Stock Exchange. But the fund does not buy Bitcoin itself. Instead, it invests in futures contracts linked to the crypto asset.

Nonetheless, this is a big step towards mainstreaming crypto, and more ETF options may become available in the future.

Read: Should I buy a bitcoin ETF? Here’s What Some Pros Say You Should Consider

Additional funds

Other funds have more direct exposure to multiple cryptocurrencies, but these have been limited to private placement for accredited investors. Grayscale and Bitwise are among the financial companies that have created such products.

There are other ways for investors to get their hands on these products as some of them have been listed on over-the-counter markets. But investing through OTC transactions, where shareholders sell directly to each other, may come with less consumer protections than traditional, centralized exchanges such as the NYSE or the Nasdaq.

Build your own portfolio

A downside to funds is that investors do not have direct ownership of their portfolios. For this reason, creating a wallet on your own can be attractive, especially when it comes to crypto, which can offer special advantages.

For example, crypto holders may want to participate in “staking,” a process available with certain cryptocurrencies that rewards participants for helping to maintain the computer networks that support their tokens. Or they may just want more control over their investment strategy.

Consult an advisor

Typically, cryptocurrencies are considered high risk investments, which should only be a small portion of your portfolio – a rule of thumb is no more than 10%.

For this reason, financial advisers often advise caution when it comes to crypto and some are reluctant to make detailed recommendations on how to build a portfolio.

“Financial planners haven’t done a good job participating in this process,” said Justin Pullaro, a Florida-based certified financial planner who advises clients on cryptocurrency.

But as interest grows among clients, some advisors are starting to offer more detailed recommendations. Pullaro said working with a professional can help potential investors feel more confident in their decision-making.

If you have a relationship with a planner, Pullaro recommended asking him how he handles crypto. Or you can search online for digital asset planners and advisers.

Explore online offers

For people who don’t have a relationship with an advisor, there are some online offerings that help people put together their crypto wallets.

While major online crypto exchanges such as Coinbase do not offer such services, new entrants to the field are trying to fill the void.

Makara, for example, allows customers to choose from eight different “baskets” of crypto assets allocated for different purposes. One, for example, includes top-notch “blue chip” cryptos, while another targets “Web3” projects focused on decentralized internet technologies.

Do it yourself

A key characteristic of the rising generation of investors is the growing confidence in making independent investment decisions. This trend has fueled the rise of digital brokerage houses such as Robinhood, and it has been a defining feature of the crypto craze.

Online tools make it easy to build your portfolio, but they can require a level of digital knowledge that not all potential crypto investors have.

As a new asset class, cryptocurrencies do not have the same analytical tools as traditional investments such as stocks. And Proudman noted that even publicly available information intended to educate people about crypto projects could be very technical.

But there are some basic principles that investors can follow if they are looking to start building their portfolios.

Pullaro suggested using analysis websites such as CoinGecko, which provides basic market data, and CryptoMiso, which can help potential investors understand how technology supported by a cryptocurrency is used.

Do not miss: Bon Doge! Crypto fans name their dogs ‘Doge’ and their cats ‘Bitcoin’ and ‘Elon’

Pullaro said the crypto market “is growing rapidly in different directions” and in ways that can be difficult to predict without significant research.

“If you don’t want to actively manage these positions and actively dig into different projects, the best thing to do is have a larger basket of [investments] it can give you exposure to the whole space, ”he said.

The author did not hold any positions in the aforementioned securities or cryptocurrencies at the time of publication. NerdWallet does not recommend or advise readers to buy or sell cryptocurrency.

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Andy Rosen writes for NerdWallet. Email: [email protected]. Twitter: @https: //twitter.com/andyrosen.

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