Diversification is the golden rule of investing. When you invest your savings in different types of assets, you reduce the risk. But if you invest all your savings in one type of asset, there is a possibility that your investment portfolio may crash. In addition, diversification gives you more than average return and you can keep a balance between your risk and target.
People used to invest in stocks, government bonds, mutual funds, gold, real estate, etc. After the growth in bitcoin, people are drawn more to the cryptocurrencies. Indeed nowadays you can even invest in new instruments like Bitcoin futures and Bitcoin CFDs.
However, some people are not sure whether it is a good investment option to include cryptocurrencies in their portfolio. If you are one of them, read on to know why you should consider cryptos.
Before that, it is important to understand what is diversification of investment portfolios and why it is important.
What is Investment Portfolio diversification?
The ultimate goal of every investor is to minimize risk and increase return. Investment portfolio diversification is a technique to reduce risk by investing in different types of financial instruments and other investment options.
This helps to maximize the return by managing the risk, however, it does not guarantee that you will never lose. The idea is to obtain long-term gains by managing the current risk through diversification. Now let us know different types of investment risks and how diversification helps to manage risk and increase profit.
Types of Investment Risks
Well, diversification can't completely eliminate risk but it can help to manage risk. But keep in mind that there are two types of risks such as systematic and unsystematic risk.
Systematic Risk
The systematic risk is also known as the market risk which can't be diversified. Because it can't be reduced or eliminated as it includes exchange rates, uncertainties like war, natural calamity, inflation rate, etc. This risk is present in every industry and company, so the investors need to accept this type of risk.
Unsystematic Risk
Unsystematic risk includes business risk and financial risk which can be diversified. These risks vary from company to company so you can analyze those things. Now let us understand the importance of diversification and why you should do that.
Let us understand the importance of diversification with a simple example. Assume that you have invested in a particular instrument and you get to know from the news that the company is going to face a decline due to some business risk. Now, in this case, you can reduce the amount and invest in another company within the same industry. This will help you to potentially reduce your risk and increase your chances of success.
That's why people diversify their investment in different types of assets. In recent years, people are looking at cryptocurrencies as a viable investment option. Now read why the crypto investors from bitcoin profit consider cryptocurrencies in their investment portfolio.
Why Should You Consider Cryptocurrencies?
There are many reasons for which you will include cryptocurrencies in your portfolio. Here are some reasons for which you should consider cryptocurrencies as an investment option.
First, the underlying technology provides a secure platform that is immutable, unhackable, and traceable. Even there are many illegal activities that occurred in the past because people were unaware of this field at that time. Today, people are much careful about fraudsters and cybercriminals.
Secondly, decentralization is one of the main reason which allows money exchange without any central authority. As centralization has a lot of issues such as complex money transfer process, slow processing, intermediary charges, etc. All of these things can be eliminated through decentralization and the future potential of cryptocurrency is bright.
The cryptocurrencies are independent, especially bitcoin. As bitcoin is directly connected to any government, banks, or financial market so it is independent. That's why it is suitable for diversification.
A Bottom Line
Well, now you might be thinking whether it's good to consider cryptocurrencies in your investment portfolio. Then, the answer totally depends on your risk tolerance capacity, the amount of investment, and your present portfolio. If you want a stable portfolio, then cryptocurrencies are not for you. If you are a little aggressive and ready to take high risk then cryptocurrencies are for you. Hopefully, the article helped you to understand the importance of diversification and why you should consider crypto.
