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Author Topic: Diversification in cryptocurrency is a bad idea  (Read 160 times)
lbassotto
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July 31, 2018, 07:29:52 PM
Merited by odolvlobo (1), d5000 (1), pooya87 (1)
 #1

Cryptocurrencies are too much correlated to Bitcoin. If he plunges then all altcoins will follow the same path or even worse. For me, buying only Bitcoin is the best thing to do at this moment.

On the link below you have some plotted data:
https://cointimes.com.br/investment-diversification-in-cryptos-bad-idea/

For example:

Correlation between Ethereum and Bitcoin is 0.82 which means a very strong correlation. In 2017 the same correlation was 0.41. For me, if you're diversifying in two types of assets that have the same correlation you're doing it wrong.

What do you think about it?

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July 31, 2018, 08:04:53 PM
Merited by d5000 (1)
 #2

You showed the difficulties in diversifying between different coins, but you didn't explain why it is "bad". Done correctly, diversification is never bad.

If you want to diversify, you must choose non-correlated assets. Non-correlated coins do exist. Just look at the article's 2017 chart. BCH was not correlated with BTC, so diversifying into BCH was a good choice. This year, however, you will need to find other coins.

The article seems to say that you want a negative correlation in your investments. That is wrong. You want a correlation that is close to 0. A negative correlation may reduce risk, but it also reduces return. For example, the correlation between buying and short selling a single asset is -1. If you did both at the same time, your risk would be 0, but then your return would also be 0 (ignoring fees).

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July 31, 2018, 09:07:27 PM
 #3

You showed the difficulties in diversifying between different coins, but you didn't explain why it is "bad". Done correctly, diversification is never bad.

If you want to diversify, you must choose non-correlated assets. Non-correlated coins do exist. Just look at the article's 2017 chart. BCH was not correlated with BTC, so diversifying into BCH was a good choice. This year, however, you will need to find other coins.

The article seems to say that you want a negative correlation in your investments. That is wrong. You want a correlation that is close to 0. A negative correlation may reduce risk, but it also reduces return. For example, the correlation between buying and short selling a single asset is -1. If you did both at the same time, your risk would be 0, but then your return would also be 0 (ignoring fees).

Totally agree

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July 31, 2018, 09:21:21 PM
 #4

Overall the article is right - the market is still extremely inter-connected. That may have to do that almost all altcoins are traded mostly in Bitcoin.

But I've observed that the success of a "diversifying" strategy has to do with the phase the market is currently in. So a good observer can achieve advantages diversifying and "un-diversifying" at the right moment.

The stats in the article you linked, for example, show that altcoins often exaggerate mid-term movements. For example, the last bullish cycle in Bitcoin in late 2017 was crazy, but much crazier in most altcoins. In contrast, in 2018 most altcoins fell much deeper than Bitcoin.

This shows us that - in contrast to most diversifying strategies at the stock market - a "diversifying" strategy in cryptocurrencies is not a good idea if you want to protect yourself from price drops. Instead, just in market phases where it's clearly visible that a crazy bubble is happening, it's best to gradually "un-diversify" - that means: gradually swap your altcoins for Bitcoin.

There are very few examples of cryptocurrencies that did better in bear markets than Bitcoin (Decred, for example, is one; Ethereum at least didn't lose as much at others), but it's difficult to predict which they are.

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July 31, 2018, 09:26:50 PM
 #5

Overall the article is right - the market is still extremely inter-connected. That may have to do that almost all altcoins are traded mostly in Bitcoin.

But I've observed that the success of a "diversifying" strategy has to do with the phase the market is currently in. So a good observer can achieve advantages diversifying and "un-diversifying" at the right moment.

The stats in the article you linked, for example, show that altcoins often exaggerate mid-term movements. For example, the last bullish cycle in Bitcoin in late 2017 was crazy, but much crazier in most altcoins. In contrast, in 2018 most altcoins fell much deeper than Bitcoin.

This shows us that - in contrast to most diversifying strategies at the stock market - a "diversifying" strategy in cryptocurrencies is not a good idea if you want to protect yourself from price drops. Instead, just in market phases where it's clearly visible that a crazy bubble is happening, it's best to gradually "un-diversify" - that means: gradually swap your altcoins for Bitcoin.

There are very few examples of cryptocurrencies that did better in bear markets than Bitcoin (Decred, for example, is one; Ethereum at least didn't lose as much at others), but it's difficult to predict which they are.

 Investment have some degree of Risk, whether diversified investment or not, it same risk that apply, it is also dependent upon the investors on the market where they put in their investment portfolio either for long tern investment or short term for such coin.



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July 31, 2018, 09:33:26 PM
 #6

It's not a bad idea to diversify your portfolio. As much as I believe in Bitcoin you can't just put all your eggs in one basket. It's healthy to have other options as long as you do your research and know what you're getting into.

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July 31, 2018, 09:38:50 PM
 #7

If you invest for a long time, then moderate diversification will be necessary for you. You can certainly buy only Bitcoin but I do not think so interestingly to invest in new projects.

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July 31, 2018, 09:42:48 PM
 #8

Cryptocurrencies are too much correlated to Bitcoin. If he plunges then all altcoins will follow the same path or even worse. For me, buying only Bitcoin is the best thing to do at this moment.

On the link below you have some plotted data:
https://cointimes.com.br/investment-diversification-in-cryptos-bad-idea/

For example:

Correlation between Ethereum and Bitcoin is 0.82 which means a very strong correlation. In 2017 the same correlation was 0.41. For me, if you're diversifying in two types of assets that have the same correlation you're doing it wrong.

What do you think about it?


Diversification is not bad at all. Actually it's a matter of choice if you do diversify you need to make sure that your choosen crypto has not correlation to each other therefore you can't be wrong in doing diversification. There some other cryptocurrencies that correlation to bitcoin that can be used for diversification. However, Bitcoin is the best investment at all.

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July 31, 2018, 09:44:49 PM
 #9

Overall the article is right - the market is still extremely inter-connected. That may have to do that almost all altcoins are traded mostly in Bitcoin.

But I've observed that the success of a "diversifying" strategy has to do with the phase the market is currently in. So a good observer can achieve advantages diversifying and "un-diversifying" at the right moment.

The stats in the article you linked, for example, show that altcoins often exaggerate mid-term movements. For example, the last bullish cycle in Bitcoin in late 2017 was crazy, but much crazier in most altcoins. In contrast, in 2018 most altcoins fell much deeper than Bitcoin.

This shows us that - in contrast to most diversifying strategies at the stock market - a "diversifying" strategy in cryptocurrencies is not a good idea if you want to protect yourself from price drops. Instead, just in market phases where it's clearly visible that a crazy bubble is happening, it's best to gradually "un-diversify" - that means: gradually swap your altcoins for Bitcoin.

There are very few examples of cryptocurrencies that did better in bear markets than Bitcoin (Decred, for example, is one; Ethereum at least didn't lose as much at others), but it's difficult to predict which they are.

I can't say that I disagree to what you are saying. Because trend of alts are pretty much same as bitcoin. It goes up when bitcoin goes up and vice versa. So diversifying between altcoins may not be a very wise idea until the investor knows when exactly to square off their position.

However, un-diversifying doesn't necessarily mean to swap the altcoins to bitcoin only. I personally prefer stable coin and I always maintain some liquidity in hand to take advantage of any situation. I usually do it uaing stablecoin only without touching the bitcoin in most of the times.

I prefer to buy alts at the bear market using my stable coin and sell those alts at bull market to get back my capital and profits in stable coin.

However, for a person who just want to hold for longer time, the best coin is bitcoin for them. But for a person who is willing to take calculated risk, should not bound themselves only to bitcoin as market presents hundreds of opportunities for them to cash on.


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July 31, 2018, 09:51:46 PM
 #10

Cryptocurrencies are too much correlated to Bitcoin. If he plunges then all altcoins will follow the same path or even worse. For me, buying only Bitcoin is the best thing to do at this moment.

On the link below you have some plotted data:
https://cointimes.com.br/investment-diversification-in-cryptos-bad-idea/

For example:

Correlation between Ethereum and Bitcoin is 0.82 which means a very strong correlation. In 2017 the same correlation was 0.41. For me, if you're diversifying in two types of assets that have the same correlation you're doing it wrong.

What do you think about it?


Well, Yes, a lot of things depend on bitcoin. If bitcoin goes up now, then all alternative cryptocurrencies will grow
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July 31, 2018, 09:56:06 PM
 #11

It's not a bad idea to diversify your portfolio. As much as I believe in Bitcoin you can't just put all your eggs in one basket. It's healthy to have other options as long as you do your research and know what you're getting into.
That's it, everyone just want to put their eggs on the same basket but you have to choose the best for you.

There's difference between diversification, holding and trading.

What other investors see on diversification, once bitcoin goes up part of their portfolio is going up and if it go sideways, alts are going opposite too.

Balance is needed but don't just buy random altcoins just to say you are diversifying.

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August 01, 2018, 12:19:22 AM
 #12

I'm slowly finding this out.  I went out of bitcoin a few weeks ago and into alts.  I have been taking a beating ever since.  Hopefully I can break even over time and get my Bitcoin back.  Huge mistake.

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August 01, 2018, 01:44:53 AM
 #13

if the bitcoin would go to undir because it would change the leadership to another could be an alcove or several at the same time existing even if that is where people are going to go, that is why I do not believe in those who have more confidence but the market of the crypto would be maintained if some alcoin would fall but people already have favorites and would select the best after bitcoin to the strongest of course start a fierce competition to take the first place

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August 01, 2018, 03:02:20 AM
 #14

If you want to diversify, you must choose non-correlated assets. Non-correlated coins do exist. Just look at the article's 2017 chart. BCH was not correlated with BTC, so diversifying into BCH was a good choice. This year, however, you will need to find other coins.

i disagree.
altcoins in the long run, they all act the same meaning they go down whenever bitcoin is active. and BCH has not been an exception to this rule either. the difference is that BCH has been new, controversial and advertised to death in the short time it existed so it might have acted a little differently from other altcoins.
but for instance when bitcoin drop began in December, BCH drop also started with a little delay since it was on a pumping spree with also a delay but the drop happened with the same process.
of course in short term (less than a couple of days) there is always exceptions because pumps happen.

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August 01, 2018, 03:24:31 AM
 #15

At present there are about 1,500 crypto types available to choose from when building a portfolio for investment, too many choices of these instruments also sometimes make investors more trouble especially with newcomers in the crypto market, but now there are also many tutorials or guides to diversify trading crypto.

Diversification is also a marketing strategy that is one of the increasing volume of crypto investment, because investors can also choose what is needed or desired by investors.

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August 01, 2018, 03:28:56 AM
 #16

If you want to diversify, you must choose non-correlated assets. Non-correlated coins do exist. Just look at the article's 2017 chart. BCH was not correlated with BTC, so diversifying into BCH was a good choice. This year, however, you will need to find other coins.

i disagree.
altcoins in the long run, they all act the same meaning they go down whenever bitcoin is active. and BCH has not been an exception to this rule either. the difference is that BCH has been new, controversial and advertised to death in the short time it existed so it might have acted a little differently from other altcoins.
but for instance when bitcoin drop began in December, BCH drop also started with a little delay since it was on a pumping spree with also a delay but the drop happened with the same process.
of course in short term (less than a couple of days) there is always exceptions because pumps happen.

Even more recently, with the bitcoin rises, not all the altcoins were jumping along as well. There's definitely a difference between the coins, but I think there's some truth to the statement that "the movement of bitcoin often influences the movement of altcoins as well."

To back this up, there isn't really much more to look at than graphs. Take a look at coinmarketcap (https://coinmarketcap.com/). You'll notice that a lot of the trends are pretty much the same as Bitcoin, aside from a select handful. Taking a look back at the extreme bullish run and the aftermath in December 2017, you'll notice there's pretty much the same trend. I'm not sure if you can group all altcoins together. I agree that they're all competing against Bitcoin, but they're also competing amongst themselves for the most support from the community.

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August 01, 2018, 03:31:28 AM
 #17

Cryptocurrencies are too much correlated to Bitcoin. If he plunges then all altcoins will follow the same path or even worse. For me, buying only Bitcoin is the best thing to do at this moment.

On the link below you have some plotted data:
https://cointimes.com.br/investment-diversification-in-cryptos-bad-idea/

For example:

Correlation between Ethereum and Bitcoin is 0.82 which means a very strong correlation. In 2017 the same correlation was 0.41. For me, if you're diversifying in two types of assets that have the same correlation you're doing it wrong.

What do you think about it?


You had a point here, eth and btc are closely related in terms of buying and selling. But, you also need to take note of the functions of each type. How each of type of coin has been earned? ETH coverage is wider than BTC. Most of the ICO tokens are supported by ETH only.

Diversity would be good because each coin plays different functions.


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Eleanorrussell64
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August 01, 2018, 03:39:16 AM
 #18

I think we should not invest all in BTC, but we can diversify investment.
Example: I have $ 100,000, I will invest 60% in BTC and the remaining 40% for ICO token (find out before buying)
This is my way of thinking.
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August 01, 2018, 03:41:39 AM
 #19

I have lost everything this year that I made the past two years, anything I try doesn't work. Trading doesn't work, the holding doesn't work diversifying doesn't work and going all out in one crypto doesn't work. My portfolio has gone down in value by 99% so I feel a total failure and am on the verge of giving up and a part of me just wants to cash in my last 15 in fiat before I become homeless. I am beginning to lose faith because the crypto markets are really over rigged.

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August 01, 2018, 05:18:52 AM
 #20

the point is buying altcoins is not even called "diversification". and the term "portfolio" was introduced last year with all the big pumps happening by the portfolio websites so that they could get more visitors/traffic and earn more money. otherwise it is not a real "portfolio" when someone buys 50 to even 100 different altcoins and tokens thinking they have diversified and then see all of them get dumped at the same time. you can't even manage that many altcoins at the same time!!!

as I always tell newcomers, you need to be a trader if you want to enter the altcoin market. it is a daily market that has good movements in short term but it is terrible if you start looking at it as an "investment".

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