Diversification is not really a strategy to increase profits, diversifying your assets is done as a way to protect yourself form losing too much money in the case one of your assets went down hard.
If your goal is to make money then you need to do the opposite, which is to concentrate your capital in just a few assets and in that way increase your profits when those assets go up in value, however as you may guess this strategy entails a bigger risk and it is not appropriate for everyone.
I do agree that diversification is a great method to make sure you do not lose all of your money. But, when you do that in crypto, it is not the same because if X coin goes down, and the market goes down, then Y coin will go down too and you would be standing there with absolutely no protection.
Diversification should be about industry, methods and things. It means, if you want to invest into stocks, do not have more than 10% of your portfolio in just one industry, and do not have more than 5% on any stock. If you want to, you could diversify as gold, stocks, bonds, crypto that way you would have 25% in all of them. When market is bad like these days though, even that won't save you too much.
And you are correct, those which try to diversify exclusively using this market are not really diversifying their capital at all, because as we know almost all the market has a positive correlation with bitcoin, which means that when bitcoin goes down those coins go down with it as well.
In order to achieve a decent level of diversification then our capital needs to be invested in different markets, to the ones you mention I will add real estate, collectibles like art and commodities as good markets in which you could diversify your investments, however if your goal is to make as much profits as you can then this market is a good choice in which to concentrate the majority of your money.
