Crypto asset diversification as a trading strategy

Since the emergence of the blockchain, specifically since the circulation of Bitcoin as a digital financial instrument, a paradigm shift in financial and economic structures has been steadily implemented on a global scale, due to the benefits that Bitcoin transactions and trading promise to date.

However, in addition to Bitcoin, alternative cryptocurrencies have also emerged, whose enormous volatility offers high returns in relatively short periods of time.

In this regard, it should be emphasised that one of the characteristics of cryptocurrencies is the rapid changes in price action, which can generate extraordinary returns, but can also lead to large financial losses.

Based on the above premise, one way to reduce financial losses is by creating crypto asset diversification strategies that provide a higher level of return and lower level of risk.

Cryptographic assets follow a logical order of decentralised financial operation mainly based on blockchain technology protocol, an element that in some way and as time has passed, this financial model has been providing confidence to investors and traders.

The confidence that investors and traders place in cryptocurrencies is probably due in part firstly to the underlying technology provided by the blockchain, as it avoids the need for a third party and this undoubtedly provides greater confidence to those who transfer economic resources online, and secondly because the mechanisms for executing transactions in short periods of time provide very attractive economic benefits.

While crypto assets can provide very attractive economic benefits, it is also important to bear in mind that the very nature of cryptocurrencies is characterised by high volatility and excessive market speculation, which inevitably and as already mentioned can help to capitalise on high returns, but if assertive strategies are not established, large economic losses can also be generated.

Therefore, in order to capitalise on high returns, it is not enough to apply trading strategies based exclusively on technical indicators, as it is also recommended to manage a diversified investment portfolio, built with uncorrelated or slightly correlated crypto assets that provide a higher probability of maximising our returns by adjusting the risk of economic losses.

➊ Anyfantaki S., Arvanitis S., and Topaloglou N Diversification, integration and cryptocurrency market. Link

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