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Author Topic: Diversification in cryptocurrency is a bad idea  (Read 148 times)
IndigoRed
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August 02, 2018, 01:25:29 AM
 #21

All bitcoin derivatives are not that different from each together. Should we encounter critical mass, I believe these cryptos will either unify as one, or just die. As an investment, diversity is good. Because so long as there is a market and someone is getting value, there can be many co-existing cryptocurrencies without hurting the rest. But if you’re focusing on crypto as a virtual currency, I think it would be more convenient to have only one. One that combines all the strengths of cryptocurrencies. This sounds appealing, correct?
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August 02, 2018, 02:32:34 AM
 #22

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.
In the particular case of BCH I agree with you. I think the reason is simply that BCH doesn't differ from other altcoins in that its trade pairs with Bitcoin are the dominant trade pairs, and so it "costs more" to move the price against Bitcoin (buyers and sellers would have to move their orders) as to "keep it in sync".

There are however cases where some currencies seem to have achieved a sort of "decoupling" from Bitcoin's price. Decred and Faircoin come into my mind, which seem both to be significantly less volatile than BTC. I'm only speculating about the reasons, but Decred has an internal "ticket" market which may be stabilizing the currency as it "freezes" a relative large amount of coins for some time (and so helps to prevent massive panic sells to a certain degree), and Faircoin has a big ecosystem of merchants and some additional, a bit centralized mechanisms that control its exchange rate (for example, a voting system to decide a peg to fiat currencies).

If coins with this kind of mechanisms like Decred and Faircoin, which reduce its dependency to the Bitcoin price, get more popular, then large-scale diversifying might begin to make sense even in bear markets and not only in some bull market phases like I wrote earlier.

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August 10, 2018, 02:21:14 PM
 #23

cryptocurrencies without hurting the rest. But if you’re focusing on crypto as a virtual currency, I think it would be more convenient to have only one.
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August 10, 2018, 02:36:43 PM
 #24

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.


I agree with you, i don’t swap alts just to buy bitcoin i prefer to buy stable coin especially in bear market which is more profitable in the long run when it goes back to bullish market. And i prefer to buy it in bitcoin market because when i sell it, automatically i hold Bitcoin which is higher value than the stablecoin.

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August 10, 2018, 02:42:15 PM
 #25

Perhaps diversification of encrypted currency assets in a declining market could lead to more asset losses, but diversification of encrypted currency is not a bad idea from an industry perspective.

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August 10, 2018, 02:51:42 PM
 #26

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?


Yes but emerging ICOs see a lot of growth, if you have picked  the right ones ofcourse. If you find a coin that you are sure to invest in, correlation does not matter because thats cyclical. In the end a strong altcoin would grow in the long run. Also if you have all your money in bitcoin, you will not be able to earn returns on a short term basis. Smart diversification is always a good idea.

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August 10, 2018, 02:51:46 PM
 #27

There are a lot of good coins on the market, but bitcoin is still the most profitable investment. Many coins that have had successful stretches in the past are already falling. It's hard to guess which coin will go up.
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August 10, 2018, 02:53:09 PM
 #28

Should we encounter critical mass, I believe these cryptos will either unify as one, or just die. As an investment, diversity is good. Because so long as there is a market and someone is getting value, there can be many co-existing cryptocurrencies without hurting the rest
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August 12, 2018, 07:31:10 PM
 #29

Both Bitcoin and Altcoin influence each other but altcoins have their own value, if the price of Bitcoin falls and the altcoin will be affected, this should be the point of rising of altcoins to defeat the dominance of Bitcoin in the crypto market.


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August 12, 2018, 07:39:41 PM
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 #30

Diversification in any investment is always a very useful thing. The main thing is to do it correctly, and not mindlessly divide the assets between hundreds of different coins.

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August 12, 2018, 07:45:34 PM
 #31

It is a bad idea only if the market falling. But if you know very well technologies, diversification is a good idea. For sure we have to invest not only in Crypto.

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August 12, 2018, 08:35:21 PM
 #32

 there is advantages and disadvantages in diversification.I think if you will go for long term investment diversification is not good idea but for short term it is a wise decision.
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August 12, 2018, 08:41:52 PM
 #33

I've understood it some months ago. It BTC price goes down, alts and tokens lose more. Better decision for your portfolio is BTC and alts from top-10 according to market cap.

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August 12, 2018, 08:44:35 PM
 #34

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?

I can hardly support your opinion just because it is so much easier to hold your money into one perspective coin that to diversified your Investment Portfolio into many coins that are not having any perspectives on that market of ours.
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August 12, 2018, 08:48:34 PM
 #35

I've understood it some months ago. It BTC price goes down, alts and tokens lose more. Better decision for your portfolio is BTC and alts from top-10 according to market cap.

That's true but does not support the title thread that diversification is bad because its not as along as like you say you choose the right and top most coins.


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August 12, 2018, 09:03:11 PM
 #36

I am also of the idea that diversification will either be bad or good depending the kind of coins you are holding or want to hold and how the correlate with each other. If you want to keep more than one coin then I thinks it’s better to keep those who correlate negatively rather than those that move in the same direction.

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