MetenaCrypto diversification: definition and limits
Spreading your capital across assets that do not react in the same way, so that a single decline does not take the whole portfolio with it.
Definition
Diversification reduces risk when the assets held do not move together. The number of holdings is not enough: ten cryptos that all follow bitcoin behave, in a decline, like a single position.
This is the main limit in crypto. Most altcoins are strongly correlated with bitcoin, and that correlation rises during crashes, at the moment when diversification would be useful. Stablecoins and assets outside crypto cushion a general market decline; a basket of altcoins does so far less.
Diversifying has a cost: each additional holding dilutes strong convictions and needs tracking. The right level depends on your thesis and on the loss you accept.
Worked example
In June 2022, bitcoin lost about 37% over the month and ether about 45%. Holding both did not reduce the loss.
In Metena
Metena measures the correlation between your positions and warns you when they are all strongly correlated. The diagnostic examines diversification in the Capital management pillar.
Notify me at launchRelated terms
- Correlation
- A measure, between −1 and 1, of how far two assets tend to move in the same direction.
- Asset allocation
- How your capital is split between several assets, expressed as target percentages.
- BTC dominance
- Bitcoin’s share of the total crypto market capitalization. When it rises, it is often at the expense of other cryptocurrencies.
- Stablecoin
- A crypto-asset designed to hold a stable value, usually pegged to a currency such as the dollar. Often used as a reserve so you are not 100% invested.
Put these ideas into practice.
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Notify me at launchEducational content. It is not investment advice. Crypto-assets carry a high risk that can go as far as the total loss of capital.