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Author Topic: Is diversification into different coins really a good advice for Newbies?  (Read 466 times)
1miau
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November 08, 2019, 11:22:13 PM
Last edit: July 16, 2020, 01:11:16 AM by 1miau
Merited by LoyceV (8), mk4 (3), pooya87 (2), bitmover (2), o_e_l_e_o (1), DdmrDdmr (1), dkbit98 (1), akhjob (1), hd49728 (1), LordShanken (1), GSpgh (1), GazetaBitcoin (1)
 #1

Most Newbie articles recommend it: "Diversify! Don’t put all eggs in a basket! Buy different coins to minimize your risk!".
So far, that sounds good at first glance, but is it true in reality? Let's have a check:


Is diversification for cryptocurrencies even applicable?

Since this advice seems to come from the market of traditional investments like stocks, precious metals and co., one should know that this strategy makes much more sense in traditional markets. Behind stocks are usually large companies that have already proven to be established on the market and the risk of a major loss is much lower, especially if you rely on the top stocks. Even precious metals such as gold and silver are not worthless from today to tomorrow, so a big loss is unlikely.

If you take the Coinmarketcap 100 as a comparison to the S&P 100, you will quickly realize that there are tons of shitcoins without concept, even if they are the TOP 100 out of more than 10,000 Altcoins. Even in the TOP 10, at least 50% can be described as shitcoins, if some of them are not even scams.
Most of these projects are still in a very early stage and even Ethereum is still not sure if their idea of PoS will be really working (as well as various other problems). And Ethereum is currently in second place, what’s self-describing for the speculativity of lower-placed coins. A loss of more than 90%, as the last 2 years have shown, is not uncommon. Such a thing would be unrealistic for most stocks as well as for precious metals or real estate.

Cryptocurrencies are just not comparable to their structure where the strategy of diversification has been used successfully so far, since the structure of crypto is much different. They offer significantly higher returns but also a significantly higher risk.


What was right in the past - diversify or not?

For cryptocurrencies in the last two years, it’s obvious that holding a high percentage of Bitcoin was the best decision. In retroperspective, you can always say that Coin xy did outperform Bitcoin, but when you analyze most of the known altcoins back in 2017 / 2018, they've lost between 80-95% since all-time high, while Bitcoin has lost only 50% until now. So, in Fiat, that means you've saved more money when you had invested solely in Bitcoin, namely 250% with an Altcoin of 80% loss and even 1,000% with an Altcoin of 95% loss. If you had invested $1000 around ATH in 2017 / 2018 you would now have $500 in Bitcoin, but only $200 in Shitcoin A with a loss of 80% and only $50 at Shitcoin B with a loss of 95%. Or the following table:


CoinInvestment around ATHLoss until nowRemaining value
__________________________________________________________________________________________________________________________
Bitcoin1000$50%500$
Shitcoin A (let’s say Litecoin, in early 2018 Rank 7)1000$80%200$
Shitcoin B (let’s say NEM, in early 2018 Rank 6)1000$95%50$


So, you quickly realize that diversifying of several top 10 coins was very counterproductive compared to investing everything in Bitcoin. Although there are also cryptocurrencies, that outperformed Bitcoin, but that doesn’t affect much a highly diversified portfolio. It’s very difficult to impossible to spot these Altcoins beforehand and very speculative to go for a single Altcoin. In addition, that would be the opposite of diversification.
Holding many different coins and "diversify", resulted in by far bigger losses than just holding Bitcoin.

I can’t predict that such statistics are relevant for the future, we’ll have to see. By comparison, many Altcoins have been outperforming Bitcoin in the last bull market. But it’s considered as very unlikely, especially due to the large mass of half-baked Altcoins offering the same use-case.


Additional problems of diversification: more workload, accidental loss of coins and risk of downloading malware

A highly diversified portfolio has some more drawdowns:

Each user will need to spend a considerable amount of work:
  • Each Altcoin has to be reviewed to see if it is sustainable and a good investment. You could also throw your money to each of the Top 10 coins but that wouldn’t be a wise decision.
  • In general, all your owned Altcoins should be regularly monitored to sell them on time should problems arise for the Altcoin. This would mean that you have to invest a lot of time, the more coins you have from different projects.
  • You have gain knowledge about the technology of each Altcoin, how the project works and create your own wallet for storing your Altcoin. This could be very difficult depending on the Altcoin, especially for newbies, and in addition put them at risk of losing the coins by mistakenly improper use. When installing various wallets, there is also a risk of downloading malware with all the bad consequences.

If you have only a few coins, these factors are greatly minimized.


In conclusion, a large part of Bitcoin in your portfolio is less speculative, less risky and less work. The more Altcoins you buy instead and reducing your percentage of Bitcoin you hold, the more speculative, riskier and more work your investment will get.

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November 09, 2019, 02:05:08 AM
 #2

Yes! I mean no! Smiley No, not a good advice, yes to your post. Diversifying among shitcoins is like diversifying among penny stocks. Worthless, useless, extremely risky with very limited upside. Unless you hit something like ETH was in 2016 you're not going to overcome the losses from the 99% garbage coins in your diversified portfolio. And even ETH is like 90% off ATH currently. And the next breakout coin is not going to be like ETH, so gambling on imitations like EOS is also not going to work. Even being technologically innovative is not a guarantee that it will be a good investment.

I've been agitating for selling altcoins but most users (even when you ignore signature spammers) still think that holding a shitcoin that lost 90%+ is better than selling because it might still recover. With that kind of logic unfortunately there is no hope to educate them.
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November 09, 2019, 02:18:54 AM
 #3

If someone wants to invest in crypto, they should put 80-90% in Bitcoin. If someone wants to invest in Bitcoin, they should put 100% in Bitcoin and don't even look at alts. If someone wants to invest in altcoins only, then diversification makes sense, because while investing in ICO/shitcoins is dumb, betting everything on one single coin/token is even dumber.

Also, people who have a lot of money and are beginner investors, or long-time hodlers who have already profited from crypto, these investors should diversify into non-crypto assets.

So, I totally agree that diversification is a complex topic, and newbies can easily shoot themselves in the foot with it. Anyone who advises diversification should present some concrete plan.

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November 09, 2019, 02:36:51 AM
Merited by 1miau (1)
 #4

The "diversify your investments" advice mostly came from the 2017 bull run as far as I remember, as almost everything is going up in price anyway. Obviously, that certain advice didn't work well if your diversification is with other coins/tokens rather than what it should actually be- with other assets in other industries and sectors(stocks, index funds, real estate, businesses, etc).

For some reason though, even with the very bad past results, I'm sometimes still hearing the "diversify with other coins" advice.

10/10

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November 09, 2019, 03:40:33 AM
 #5

It should have been but the industry doesn't make it quite easy to benefit from cryptocurrency diversifying per se especially in bear market. Lets assume the sum of $1000 was given to two newbies to invest in altcoins from the top 10 at the beginning of 2017, estimating the profit from investing in 5 different altcoins with $200 each or investing in one altcoin with the total capital, what are the chances that, the newbie that invested in just one altcoin would had made the correct pick as to be lucky to earned enough ROI as the user that picked different altcoins.

Diversifying only works in short term Investing during bull runs since what the investors is typically during is, increasing his chances of winning by picking more altcoins instead of subjecting his chances to just one altcoin. It's quite a reasonable idea that's if the newbie in question is mostly interested in investing in altcoins.





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November 09, 2019, 04:27:31 AM
Merited by 1miau (1)
 #6

in addition, i see two main problems with all the altcoins that makes them worst things to consider for diversification.
first is the obvious fact that they are always going down in long term, specially whenever bitcoin is making a move no matter if it is a rise or a fall, the altcoins drop. but usually people look at the USD value of altcoins which (only during bitcoin rises) gives them the false sense of profit. what really happens is that if an altcoin is worth 0.1 bitcoin and bitcoin is worth $1000 they show value of $100 then bitcoin rises to $2000 and these coins dump to 0.51 bitcoin but then show price of $1050 so people think they have made profit while their altcoin "gained value"! whereas they have lost almost half of their investment.

second problem is that altcoins are more like penny stocks. the problem with that is similar to penny stocks, extremely high risks. the way they diversify in penny stocks is that since the cost of each share is small, they buy lots of different things with a small amount of money trying to spread the risk. most consider this foolish though! so even if someone wants to diversify they still should do it like: 99% bitcoin + 1% (50x altcoins). but then again the same problem (unlike penny stocks) exists here. if bitcoin drops all those 50 altcoins will drop harder so there is no achievement here.

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November 09, 2019, 05:28:02 AM
Merited by DdmrDdmr (1)
 #7

If you want to diversify, buy ETF, bonds, gold, silver...
Buy other cryptocurrencies is not a diversification


I wrote about it recently

It makes no sense to "diversify" in assets which are totally correlated. As mentioned above, you will only increase your risk and volatility.

Take a look at this graphic, from coinmarketcap, that I took from this website (https://smartereum.com/1887/ethereum-bitcoin-ripple-cardano-cryptocurrency-prices-going/)


If you look carefully, youi will see that the graphics are all the same, so it makes no sense to diversify here.

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November 09, 2019, 05:56:13 AM
 #8

Automatically you are saying litecoin and nem are both shitcoins? i hope you are right, people only like talking about the present condition and not about tomorrow, just because litecoin value dropped alot doesn't mean its the end, those who are really at lose are the ones that sell their coins and accept their loss
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November 09, 2019, 06:07:55 AM
 #9

Most Newbie articles recommend it: "Diversify! Don’t put all eggs in a basket! Buy different coins to minimize your risk!"
So far, that sounds good at first glance, but is it true in reality? Let's have a check:


Is diversification for cryptocurrencies even applicable?

Since this advice seems to come from the market of traditional investments like stocks, precious metals and co., one should know that this strategy makes much more sense in traditional markets. Behind stocks are usually large companies that have already proven to be established on the market and the risk of a major loss is much lower, especially if you rely on the top stocks. Even precious metals such as gold and silver are not worthless from today to tomorrow, so a big loss is unlikely.

If you take the Coinmarketcap 100 as a comparison to the S&P 100, you will quickly realize that there are tons of shitcoins without concept, even if they are the TOP 100 out of more than 10,000 Altcoins. Even in the TOP 10, at least 50% can be described as shitcoins, if some of them are not even scams.
Most of these projects are still in a very early stage and even Ethereum is still not sure if their idea of PoS will be really working (as well as various other problems). And Ethereum is currently in second place, what’s self-describing for the speculativity of lower-placed coins. A loss of more than 90%, as the last 2 years have shown, is not uncommon. Such a thing would be unrealistic for most stocks as well as for precious metals or real estate.

Cryptocurrencies are just not comparable to their structure where the strategy of diversification has been used successfully so far, since the structure of crypto is much different. They offer significantly higher returns but also a significantly higher risk.


What was right in the past - diversify or not?

For cryptocurrencies in the last two years, it’s obvious that holding a high percentage of Bitcoin was the best decision. In retroperspective, you can always say that Coin xy did outperform Bitcoin, but when you analyze most of the known altcoins back in 2017 / 2018, they've lost between 80-95% since all-time high, while Bitcoin has lost only 50% until now. So, in Fiat, that means you've saved more money when you had invested solely in Bitcoin, namely 250% with an Altcoin of 80% loss and even 1,000% with an Altcoin of 95% loss. If you had invested $1000 around ATH in 2017 / 2018 you would now have $500 in Bitcoin, but only $200 in Shitcoin A with a loss of 80% and only $50 at Shitcoin B with a loss of 95%. Or the following table:


CoinInvestment around ATHLoss until nowremaining value
__________________________________________________________________________________________________________________________
Bitcoin1000$50%500$
Shitcoin A (let’s say Litecoin, in early 2018 Rank 7)1000$80%200$
Shitcoin B (let’s say NEM, in early 2018 Rank 6)1000$95%50$


So, you quickly realize that diversifying of several top 10 coins was very counterproductive compared to investing everything in Bitcoin. Although there are also cryptocurrencies, that outperformed Bitcoin, but that doesn’t affect much a highly diversified portfolio. It’s very difficult to impossible to spot these Altcoins beforehand and very speculative to go for a single Altcoin. In addition, that would be the opposite of diversification.
Holding many different coins and "diversify", resulted in by far bigger losses than just holding Bitcoin.

I can’t predict that such statistics are relevant for the future, we’ll have to see. By comparison, many Altcoins have been outperforming Bitcoin in the last bull market. But it’s considered as very unlikely, especially due to the large mass of half-baked Altcoins offering the same use-case.


Additional problems of diversification: more workload, accidental loss of coins and risk of downloading malware

A highly diversified portfolio has some more drawdowns:

Each user will need to spend a considerable amount of work:
  • Each Altcoin has to be reviewed to see if it is sustainable and a good investment. You could also throw your money to each of the Top 10 coins but that wouldn’t be a wise decision.
  • In general, all your owned Altcoins should be regularly monitored to sell them on time should problems arise for the Altcoin. This would mean that you have to invest a lot of time, the more coins you have from different projects.
  • You have gain knowledge about the technology of each Altcoin, how the project works and create your own wallet for storing your Altcoin. This could be very difficult depending on the Altcoin, especially for newbies, and in addition put them at risk of losing the coins by mistakenly improper use. When installing various wallets, there is also a risk of downloading malware with all the bad consequences.

If you have only a few coins, these factors are greatly minimized.


In conclusion, a large part of Bitcoin in your portfolio is less speculative, less risky and less work. The more Altcoins you buy instead and reducing your percentage of Bitcoin you hold, the more speculative, riskier and more work your investment will get.

Hello, using coinomi wallet you can add top10 coins without separate wallets, the wallet support over 100 different altcoins, storing altcoins in a single wallet is now made easier with All in one wallets like coinomi
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November 09, 2019, 06:48:14 AM
 #10

So in simple words, investing in altcoin is not worthy anymore because you will not gain any profit in the long run? It is only profitable for a short time and when there's a bull run. Should we still wait for the 8 years to see the total growth and development of an altcoin? We would say to newbies like this "Hey, invest only in bitcoin! Don't put your money in altcoin". Is that so?
Did you imagine that there are times you needed them, like saving a fee, making your transactions speed faster and etc. Did you acknowledge the role of altcoins in terms of their uses not only on their prices?

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November 09, 2019, 06:51:27 AM
 #11

I don't think it'll work for them, without enough knowledge of what they about to do, it might become hard for them in the long run. They just need to focus on a single coin at first. then should research how to hold multiple coins in the long run with enough patience. they need to build their patience in a single coin before proceeding to the next level I guess.

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November 09, 2019, 06:59:05 AM
 #12

The "diversify your investments" advice mostly came from the 2017 bull run as far as I remember, as almost everything is going up in price anyway. Obviously, that certain advice didn't work well if your diversification is with other coins/tokens rather than what it should actually be- with other assets in other industries and sectors(stocks, index funds, real estate, businesses, etc).

For some reason though, even with the very bad past results, I'm sometimes still hearing the "diversify with other coins" advice.

10/10
I did say diversify also before since altcoins those time were all have potential and have value, but when ATH happens many decides to sell their alts that makes those projects now some exit and some no longer updates. Due to this we are all aware now, that since there are too many altcoins now investing in them for long will not work as it was before so better have the one that can survive through bull or bear season especially for newbies who don't have idea about altcoins.

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November 09, 2019, 07:05:04 AM
Merited by 1miau (1)
 #13

I allocate 80 percent of my capital into bitcoin. For the rest 20 percent of my capital to invest in altcoins and this part divided into two parts:
- One part for traditional, old altcoins (top ones): 10 to 15 percent of my capital
- One part for new-born altcoins: only 5 percent of my capital. This part is for very risky investment. Even after I due my diligent investigation before investing, it is a risky investment, obviously.

Look at the image, you can see that top altcoins at their temp prices have still lost significant values from their All-time-highs. Investors have lost more in altcoins than in bitcoin investment.


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November 09, 2019, 11:47:51 AM
Merited by 1miau (1)
 #14

If you take the Coinmarketcap 100 as a comparison to the S&P 100
Great post. To run a bit further with why this comparison doesn't work: The companies listed on any stock market index are not as inextricably linked to each other as altcoins are to bitcoin. If Home Depot collapses, will it take Netflix with it? If Kraft Heinz tanks, should we expect a knock on effect on Facebook? What about NVIDIA and McDonald's? Of course not. Yet as we've seen time and time again, any time bitcoin hits a bear market, every single altcoin goes down with it. You can't call altcoins "diversification" when they just follow bitcoin whenever it goes down.

I've been agitating for selling altcoins but most users (even when you ignore signature spammers) still think that holding a shitcoin that lost 90%+ is better than selling because it might still recover.
You see that kind of logic all the time. "A loss isn't a loss until you sell". That's great advice for assets like bitcoin which will almost certainly go back up, and your short term loss will turn in to a long term gain. It's terrible advice for assets like shitcoins which are only going down, and your short term loss will turn in to an even bigger long term loss.

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November 09, 2019, 12:51:06 PM
 #15

Most Newbie articles recommend it: "Diversify! Don’t put all eggs in a basket! Buy different coins to minimize your risk!"
So far, that sounds good at first glance, but is it true in reality? Let's have a check:


Its common advice but from stock market.
Bitcoin/crypto market is completly different. Bitcoin is revolutionary technology, every other crypto except Ethereum is just copy-paste of Bitcoin, so common plagiarism trying to hide it with minor changes to rules and name.
I would NEVER advice anyone to buy altcoins. Not only waste of time, but straight way to loosing money.

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November 09, 2019, 10:45:05 PM
 #16

This is the picture of diversification:  https://coinmarketcrap.co/
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November 09, 2019, 11:02:40 PM
 #17

in addition, i see two main problems with all the altcoins that makes them worst things to consider for diversification.
first is the obvious fact that they are always going down in long term, specially whenever bitcoin is making a move no matter if it is a rise or a fall, the altcoins drop. but usually people look at the USD value of altcoins which (only during bitcoin rises) gives them the false sense of profit. what really happens is that if an altcoin is worth 0.1 bitcoin and bitcoin is worth $1000 they show value of $100 then bitcoin rises to $2000 and these coins dump to 0.51 bitcoin but then show price of $1050 so people think they have made profit while their altcoin "gained value"! whereas they have lost almost half of their investment.
Good point, it's common to see only the $ value and people are happy if their altcoin "rises" a little bit while it's less worth calculated in BTC. Same goes for mining / cloudmining when people buy hashrate and make money in $ like investing 500$ (0.1BTC) and now they have 600$ but it's only 0.05BTC anymore because Bitcoin rose much more. But different topic.  Wink



I allocate 80 percent of my capital into bitcoin. For the rest 20 percent of my capital to invest in altcoins and this part divided into two parts:
- One part for traditional, old altcoins (top ones): 10 to 15 percent of my capital
- One part for new-born altcoins: only 5 percent of my capital. This part is for very risky investment. Even after I due my diligent investigation before investing, it is a risky investment, obviously.
It's a good strategy in my opinion. I'm always searching for promising, new altcoins but it's so hard to wade through tons of shitcoins and waste time for research...
The experience hasn't been misleading, a large part Bitcoin is the best choice.



You see that kind of logic all the time. "A loss isn't a loss until you sell". That's great advice for assets like bitcoin which will almost certainly go back up, and your short term loss will turn in to a long term gain. It's terrible advice for assets like shitcoins which are only going down, and your short term loss will turn in to an even bigger long term loss.
Well said, most legit altcoins start with high expectations but the devs start realizing different kind of problems soon, making adjustments to solve the problems but that is disclosing much more problems and finally the project is dissappointing the public expectations and failing to deliever. In such cases, it's very unlikely that the price will recover.



This is the picture of diversification:  https://coinmarketcrap.co/
Cheesy Cheesy



I've adjusted the title a little bit to avoid misunderstandings. Of course people should buy into different, not correlated assets and buy gold, stocks etc in addition to crypto.

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November 11, 2019, 01:50:24 PM
 #18

2017 I follow instruction to diversify asset to few coin, I choose RDD, Sia, XDN and EMC2, when bitcoin droppes from $19.xxx I hold my asset waiting for bitcoin pull back. But, my analisys fail, now from small amount $200, current asset drop 98%, its mean what 1miau says is really true, hold in Altcoin is very risky, if btc drop, altcoin will drop more deep.

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November 11, 2019, 03:14:33 PM
 #19

Diversification only works when you are diverting into a negative co-related investments. For stock investments, some projects may have good time in December while some others may have bad time in December. It makes sense if you are investing both of the above conditions. Negative co-related portfolio don't give much profit but these are very effective when someone wants to leverage the risk to investment.

In cryptocurrency, as like bitmover said, all the coins are positively related. If BTC price increases, altcoin increases too, if BTC price decreases, altcoin price decreases as well. So, diversifying in cryptocurrency makes no sense.

In most cases, diversification mostly refer changing the nature of investment, changing the industry.

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November 12, 2019, 10:03:27 AM
 #20

Its not really advisable for newbies right now to diversify into altcoins since I feel there is still a market turmoil. And with this, I agree with the opinion of others  but I want to emphasize how I have been grateful and a little fortunate enough to hold some altcoins wayback in 2018 bull run, where I manage to acquire a little amount of Bitcoin and also convert some to cash!

Without those altcoins, I would never imagine my portfolio had gone ATH and for that I am grateful enough.

Nowadays, its so easy to disregard altcoins even if some of them have promising fundamentals but lets not forget that some of our fellow crypto enthusiasts had managed to have a significant amount of Bitcoin now by selling their  altcoins when it has reached ATH about 2 years ago. Grin Imho.
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