Is diversification into different coins really a good advice for Newbies?

[gentlemand]

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

Both of those projects are among the least offensive in how they operate, but shitcoins can be shit because of the way the market treats them. Poor old nem in particular has never earned any respect and is picked up and dropped again without a second thought.

Of course it could come roaring back but I wouldn't expect it to sustain unless something radical happened.

In terms of the original question, if you want to play with alts the most common mistake I see is people settling on only one or two. They all pretty much move as one as hardly anyone knows or cares about the differences between them but there's always a few losers. You may wind up deep in one of the few left behind.

If I wanted to play alts I'd spread it across a bunch and forget about it. And it would never be a high percentage of what I had in crypto.

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[aardvark15]

I suggest starting with Bitcoin and then educate yourself on the altcoins before investing. Many of the altcoins are specialized and it can be very confusing to know what to invest in. If you decide to branch out to other cryptocurrencies, be aware that not all will succeed. My advice is look at coins in the top 100 in market cap and do a lot of research.

[pooya87]

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!

It isn't really advisable to "diversify" into altcoins regardless if we're in a bull or a bear market, because putting money on altcoins isn't "diversification" in the first place. Bitcoin and altcoins are hugely correlated.

And I get your point that a lot of people made a good amount of money with alts in the past(even I, made some profit in sats), but lets be completely honest, those were huge gambles. Also, the main point of diversification isn't to maximize profit in the first place- it's to decrease risk.

you can only make profit from altcoins if you trade them instead of investing in them and there is a big difference between the two. investing is buying and forgetting for a long time and can only be profitable if the asset you buy has a good future but trading is a short term thing that requires active participation in the market and since altcoins are pump and dumping, it makes trading more profitable but also risky.
people who have made profit in 2017 were either lucky newbies who lost it all in following months or traders who got in and got out fast.

[masulum]

<snip>
people who have made profit in 2017 were either lucky newbies who lost it all in following months or traders who got in and got out fast.

This is really happen to me, October 2017 I made a huge profits arround 200% in total, and save 50% of my profit to buy some altcoin (mentioned on previous post). Because I don't know to implement TA on my assets, i decide to hodl, and now my asset like nothing even i diversify in altcoin as many people says. But, I am happy because nothing to lose for me, that just 50% from profits not my primary investment.

[lobat999]

~snip~

putting money on altcoins isn't "diversification" in the first place. Bitcoin and altcoins are hugely correlated.

I believe OP is correct in using the term "diversification", which refers to having altcoins instead  of having a Bitcoin only portfolio. A good analogy for this is with the case of  traditional investors who always seeks to diversify their portfolio buy acquiring different "stocks"  to minimize risks. So in essence, acquiring altcoins is still technically a form of diversification regardless if its hugely correlated to Bitcoin or not. Imho.

[o_e_l_e_o]

Nowadays, its so easy to disregard altcoins even if some of them have promising fundamentals

There is a big difference between "promising fundamentals" and an actual working product or real world use. I could go an write a whitepaper right now in under 30 minutes with loads of "promising fundamentals" - doesn't mean anything if the coins is never actually developed and only used for speculation and pump and dumps.

people who have made profit in 2017 were either lucky newbies who lost it all in following months or traders who got in and got out fast.

Anyone could make profit in 2017. Throw $100 buck in to literally any old coin and you could double your money within a few days. The problem was that most people took that to mean that they were some kind of great investor, became very greedy, didn't cash out, and are now still holding some utter trash which is down 99%.

A good analogy for this is with the case of  traditional investors who always seeks to diversify their portfolio buy acquiring different "stocks"  to minimize risks.

It's a flawed analogy as I explained in my earlier post in this thread. If one stock dumps, it doesn't take the entire stock market with it. In that way, spreading in to different stocks is diversification, because if one dumps, your others will likely remain fairly stable. Spreading in to altcoins is not diversification, because if bitcoin dumps, it takes the entire crypto market with it.

[CryptopreneurBrainboss]

I still based my reasoning on this school of thought, if you're a newbie that picked interest in investing in altcoins per se then investing in different set of projects is a perfect strategy to combat the risk of losing all your investment capital, just on one altcoin but if you joined the industry without any prior knowledge and wanting to diversify then the suggestion above should be the perfect strategy i.e you buy bitcoin and go buy other assets like stocks, company shares etc.

We'll always have those who'll be interested in Investing in altcoins, these set of Investors should always diversify, the rule of not 'keeping all your eggs in one basket' per se has to apply here since recent stats are indicating progress in selective altcoins compared to the general altcoin market. Although on a general note, they're investing in a particular class of investment "cryptocurrency - altcoins (to be specific)" but atleast their funds aren't tired to a particular project.

[GSpgh]

I believe OP is correct in using the term "diversification", which refers to having altcoins instead  of having a Bitcoin only portfolio. A good analogy for this is with the case of  traditional investors who always seeks to diversify their portfolio buy acquiring different "stocks"  to minimize risks. So in essence, acquiring altcoins is still technically a form of diversification regardless if its hugely correlated to Bitcoin or not. Imho.

No, it's not diversification if the assets are not diverse. Correlation is a major factor in stock portfolio management so your analogy just confirms that it should be considered when investing in crypto as well. Low correlation can reduce risk, high correlation can increase risk.

[DdmrDdmr]

I found this interesting exercise on the topic: https://medium.com/bull-bitcoin/the-crypto-diversification-trap-6744b0a954a6

It goes on to show what a diversified portafolio, suggested by Brian Kelly on CNBC in 2017, looks like today. It displays the portfolio value in USD and the cost of opportunity on BTC. Fine, the article is not at it’s best (too many freak images), and perhaps the portafolio is not my piece of cake, but the author performed an interesting exercise.

To cut a long story short, the suggested portafolio back in 2017 by Brian Kelly was: (only) 30% Bitcoin, 15% Ethereum, 15%  Ethereum Classic, 10% ZCash, 10% Monero, 10% Ripple, 5% Metal (wtf?) and 5% Iota.

The result is that, if you invested 10K in August 2017 into the above diversified crypto-portfolio, two years later you would have ended being up +33,56%. The thing is, when you go into the details, Bitcoin rendered the vast majority of the benefit, and only Ripple and Monero contributed marginally to the benefit. The others were at a sever loss.

The cost of opportunity in diversifying in the sample case is that, had you invested it all in Bitcoin initially, your 10K would be now (August 2019) worth 26,6K (+266,84% vs the 33,56% made).

Of course that is just an example, but one of what advice a couple of years ago would have led to today.

[darkangel11]

I will speak in the defense of litecoin, which isn't a total shitcoin and gave people a very good opportunity this year.
If you compare the lows, Bitcoin went to 3,2k USD and then peaked at 14k. LTC to 20 USD and then 120 when it followed Bitcoin's pump. So Bitcoin's value increased roughly by 4 times and Litecoin's 5 times. Some people like altcoins because they lose more and later gain more.
There's a difference between an altcoin and a shitcoin. Altcoins like Monero, Litecoin, BCH, follow Bitcoin. When it pumps they pump and when it dumps they dump. Shitcoins lose value in general and their pumps are insignificant and always lead to lower lows. LSK is a good example.

[1miau]

I found this interesting exercise on the topic: https://medium.com/bull-bitcoin/the-crypto-diversification-trap-6744b0a954a6

Very good read, it's alarming that the guy lost almost 50% in Bitcoin because his Altcoins went down:

On August 20th 2017, $10,000 COULD have bought you 2.44638742 BTC or 244,638,742 sats. With the above portfolio you would have taken a loss of 1.22196437 BTC — that’s over 122 MILLION sats (just shy of half, at 49.95% of your initial stash)

Could be interesting to do such a study today, wait a year and compare it again.
LoyceV did something similar:

LoyceV's Legendary 10 Month 10 Person 10 Altcoin Investment Experiment Hint: no happy End
https://bitcointalk.org/index.php?topic=2024536.msg43452201#msg43452201

[lobat999]

Nowadays, its so easy to disregard altcoins even if some of them have promising fundamentals

There is a big difference between "promising fundamentals" and an actual working product or real world use. I could go an write a whitepaper right now in under 30 minutes with loads of "promising fundamentals" - doesn't mean anything if the coins is never actually developed and only used for speculation and pump and dumps.

By that I mean those altcoins having promising fundamentals are altcoins that has a fully functioning ecosystem and products, or it has capable team, good tokenomics and exhibits continuous development and improvement and not necessary having only ideas based on whitepaper which is of course often disregarded by the community.

A good analogy for this is with the case of  traditional investors who always seeks to diversify their portfolio buy acquiring different "stocks"  to minimize risks.

It's a flawed analogy as I explained in my earlier post in this thread. If one stock dumps, it doesn't take the entire stock market with it. In that way, spreading in to different stocks is diversification, because if one dumps, your others will likely remain fairly stable. Spreading in to altcoins is not diversification, because if bitcoin dumps, it takes the entire crypto market with it.

You have a point but be as it may and in the context of crypto investment, I have to disagree because I believe that holding altcoins is still a "diversification" for me like those big bag holders who spread their portfolio across several cryptocurrencies with the belief that they are in some way or the other "diversifying" their portfolio.

Though I must admit it is not an ideal way of diversification, I also believe it is a common practice by most crypto investors nowadays.

~snip~

Correlation is a major factor in stock portfolio management so your analogy just confirms that it should be considered when investing in crypto as well. Low correlation can reduce risk, high correlation can increase risk.

I agree that considering the degree of correlation of assets is a great way to diversify a crypto portfolio and I must admit that altcoins have a higher degree of correlation with Bitcoin because almost all of them are paired together with Bitcoin on crypto markets.

Now, I did see some altcoins that is only paired with stablecoins and I understand there is a low degree of correlation  with Bitcoin, which I think could be an asset worth holding to make our portfolio more diverse. Imho.

[mk4]

you can only make profit from altcoins if you trade them instead of investing in them and there is a big difference between the two. investing is buying and forgetting for a long time and can only be profitable if the asset you buy has a good future but trading is a short term thing that requires active participation in the market and since altcoins are pump and dumping, it makes trading more profitable but also risky.
people who have made profit in 2017 were either lucky newbies who lost it all in following months or traders who got in and got out fast.

I 98% agree with this. Contrary to popular opinion from bitcoin maximalists(I say that in a neutral manner and not as an insult btw just to be clear), I still think that it's possible to make money from certain altcoins as a long-term investment. It's just that the chances of a person of picking the correct long-term potentially winning altcoins is really really slim hence it's really not advisable to hold anything rather than bitcoin.

[o_e_l_e_o]

By that I mean those altcoins having promising fundamentals are altcoins that has a fully functioning ecosystem and products, or it has capable team, good tokenomics and exhibits continuous development and improvement and not necessary having only ideas based on whitepaper which is of course often disregarded by the community.

There are a grand total of maybe 3 altcoins which fit that description though, and even then, although they have their only fully functioning product with its own use case and ongoing development, if bitcoin were to crash, they would all crash too.

I believe that holding altcoins is still a "diversification" for me like those big bag holders who spread their portfolio across several cryptocurrencies with the belief that they are in some way or the other "diversifying" their portfolio.

Just because you think it is diversification, doesn't make it true I'm afraid. As we've seen countless times, when bitcoin crashes then the entire crypto-space crashes with it. When your assets are so completely correlated, then you haven't reduced your risk at all, and so you aren't diversified.

[lobat999]

By that I mean those altcoins having promising fundamentals are altcoins that has a fully functioning ecosystem and products, or it has capable team, good tokenomics and exhibits continuous development and improvement and not necessary having only ideas based on whitepaper which is of course often disregarded by the community.

There are a grand total of maybe 3 altcoins which fit that description though, and even then, although they have their only fully functioning product with its own use case and ongoing development, if bitcoin were to crash, they would all crash too.

Unfortunately that is a sad reality because those assets are heavily paired with Bitcoin in crypto markets that they are almost inherently and tightly bound to each other.

Just because you think it is diversification, doesn't make it true I'm afraid. As we've seen countless times, when bitcoin crashes then the entire crypto-space crashes with it. When your assets are so completely correlated, then you haven't reduced your risk at all, and so you aren't diversified.

I hope this status quo will gradually change as there are right now crypto asset(s) that aren't paired to Bitcoin (maybe by design of the core team) but rather, they are paired with a stable coin which makes them less correlated to Bitcoin and could be a good choice for diversifying our crypto portfolio. Imho.

[GSpgh]

I agree that considering the degree of correlation of assets is a great way to diversify a crypto portfolio and I must admit that altcoins have a higher degree of correlation with Bitcoin because almost all of them are paired together with Bitcoin on crypto markets.

Do you mean trading pairs like ETH/BTC? I don't think that defines correlation. It's about the fact that cryptocurrencies in general belong in the same very narrow industry. Like all oil stocks go up and down in lockstep because some crown prince said something regardless if those stocks are traded against USD or EUR, cryptocurrencies also move mostly the same direction when something happens that affects the crypto industry.

By market cap (~$200 billion) this industry is similar in size to S&P airlines sector for example, and about 5% the size of banking, to give you a sense of scale, even tho stock market caps don't compare directly to crypto often fake market caps. This shows both that there is lot of space for growth and that being so tiny it can be affected by any little thing and there is not much room for diversification inside it.

[Chain Clash]

True for newbies. Most other coins correlate strongly with Bitcoin, and crypto as a whole should be only one asset in the portfolio of a newbie (or anyone, really).

Also, people should at least roughly know what they're getting themselves into when *investing* in something, and Bitcoin will be the asset with the most reliable information.

[Harlot]

The advice "Don't put all your eggs in one basket" is something that does not apply in the crypto market, yeah sure that there are some crytpocurrencies that goes into the opposite direction compare to the majority but almost everything follows the movement of Bitcoin or if not Bitcoin the majority of the altcoins during alt season. Don't put all your eggs in one basket simply means do not put all your money in the same industry where in stocks you must focus your money into different sectors like one for energy, one for real estate, and another one for banking in the crypto "industry" you don't have that kind of diversification option since they are all cryptocurrencies and they only belong to one industry.

[bitmover]

I took one step forward in this diversification idea, and I took a look at this site:
https://www.bitwiseinvestments.com/

They have some passive funds, which are similar to an ETF.

They have those Cryptocurrency Index funds, which are Top10, Top100, etc... by market capitalization. They do not do fundamentals research or whatever. They just pick the top cryptocurrency by market capitalization, this is why they are a passive fund.

I compared the performance of all those funds agaisnt bitcoin since january 2017 and since one year ago. Especially the Top10 one, which you can see its composition on the right side (only "good"coins, eth, xrp, dash, ada, bch, xml....)
The result? Bitcoin has a better performance.

You can check here:



Since November 2018, Top 10 cryptocurrencies performance was 10%, while bitcoin 37%.
If you look at top 70 (more shitcoins), their performance was -50%, while bitcoin +37%.
Top100 was 6%, while bitcoin 37%.

Considering since 2017 1st January (since fund launched), top10 perfomance was slightly better: 844% vs 807% bitcoin. So top10 performed slighty better (5% more money), however with much more  risk.

Conclusion: Sell your shitcoins and buy bitcoin. It is better in long term and less risky. (considering past performance)

[pooya87]

~
I 98% agree with this. Contrary to popular opinion from bitcoin maximalists(I say that in a neutral manner and not as an insult btw just to be clear), I still think that it's possible to make money from certain altcoins as a long-term investment. It's just that the chances of a person of picking the correct long-term potentially winning altcoins is really really slim hence it's really not advisable to hold anything rather than bitcoin.

there are of course altcoins that have gained value but the problem that i have is that when it comes to "investment" i don't like leaving it to "chance", instead i want to see potential before making an investment. and so far i have never seen any long term potential in any of the altcoins.

for instance take the biggest altcoin market-cap-wise, ethereum. at first back in 2015 i thought it is one of the best projects ever built because of its idea but the more i looked at it the more flaws i saw, centralization, lack of scaling, roll back and lack of immutability, the huge premine, scams, their market manipulations,.... so i never saw any potential in it.
looking at its price, it has not gained its value through adoption or consistent rises over time. instead it gained its value through pumps and only one of these pumps has lasted, the rest have popped and price has gone back down.
the initial pump was in 2016 when after a year of constant dumps they pumped it from 0.002 to 0.03 in only one month and again after another year of dumping down to 0.01 they pumped it to 0.15 this time in 5 months and it has been dumping for over 2.5 years back towards that 0.01 (currently 0.02).
that is why they are best for short term trading (1 month, 5 month here or the usually 500% pump in one day) not long term investment.