Why You Shouldn’t Just Trade Bitcoin
Bitcoin is the first, most well-known and priciest cryptocurrency out there, but it’s not the only one you should have your eyes on.
It is still far too early to predict whether Bitcoin will be the one and the only cryptocurrency still standing at the end. Indeed, it has only been around for 10 years.
At the time of writing, it is predicted that there are as many as 2,000 different cryptocurrencies available to buy and trade.
Of course, it is highly likely that most of them will not survive. We may even see cryptocurrency bubble emerge soon and wipe out many different cryptocurrencies.
Arguably, some things do not need to be tokenised and they are likely just jumping in the cryptocurrency bandwagon.
While Bitcoin is in the truest sense a functioning cryptocurrency, as a trader, trading just Bitcoin is risky and not very wise.
There are tonnes of other cryptocurrencies out there to choose from that you can profit from trading.
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Diversify your risk
The idea behind diversifying your risk is simple; to optimise your risk-reward ratio and lower the chances of making a permanent loss.
What this means is that you should trade multiple pairs. The reason traders do this is to not be completely exposed when the market goes down.
What happens if Bitcoin suddenly sinks to new lows? You may lose everything. It’s a classic example of not putting all your eggs in one basket.
To make things worse, what if Bitcoin is down for months or even half a year? You may need to get that money back at a loss.
Instead, by trading three or so cryptocurrencies, including Bitcoin, you can mitigate risk and keep trading when Bitcoin is down.
Making losses is a normal part of trading and you need to be prepared for that eventuality. It’s not if you’ll make losses, it’s when and how you’ll deal with it.
Not diversifying your risk is one of the biggest mistakes any trader can do. It is a big trap that many cryptocurrency traders fall into.
They get so excited about their favourite cryptocurrency and are completely sure it will be a success. Sadly, most cryptocurrency traders do not know about such trading tactics.
They are then totally caught by surprise when their chosen cryptocurrency falls in price or even completely crashes.
In a properly diversified trading portfolio, Bitcoin shouldn’t make up more than 10%.
For further diversification, you should look at forex and stocks to take up a healthy percentage that isn’t cryptocurrency.
Avoid regulatory fallout
Bitcoin gets the most heat from regulatory officials because it is so well-known. Often when Bitcoin is spoken negatively about in the news, it can harm its price.
Then again, when there is negative news of regulating Bitcoin, it can affect the whole market and diversification may not matter so much.
Sometimes there is nothing you can do.
A lot of the time, if you check the charts, you will see that most cryptocurrencies mimic Bitcoin in terms of price movements.
By trading just Bitcoin you are missing opportunities
Diversification is not just about not losing money, it’s also about making more money.
Bitcoin is not the only cryptocurrency with volatile movements in price, many altcoins are also very volatile and show good potential to get in and out fast.
Many traders get involved early with altcoins, purchasing them in the ICO and selling when the ICO finishes. These opportunities are great to make a quick profit.
These traders do not know much about the cryptocurrency they are investing in or care about it, they just believe that the price will shoot up after the ICO.
What cryptocurrencies to choose?
When diversifying your risk, you want to look for cryptocurrencies that offer something very different to Bitcoin, one’s that stand out for their uniqueness and possess different qualities.
More specifically, look at cryptocurrencies that offer what Bitcoin lacks.
One of the major things you can look into is smart contracts and dApps. While it is possible to use Bitcoin for smart contracts, its features are very limited.
In a sense, they are a completely different industry. Bitcoin is all about replacing the way we make transactions, while cryptocurrencies like Ethereum have a much wider scope.
They plan to change the very way the Internet works and applications work, on top of how we manage legal agreements.
Ideally, by diversifying your risk with a cryptocurrency like Ethereum, you could be safer when Bitcoin goes down.
You may even find that when Bitcoin goes down, the alternatives may go up as other traders are looking for somewhere to store their funds when Bitcoin is too turbulent or in a bear market.
However, you decide to hedge Bitcoin, make sure you understand the limitations of the coins you may decide to use.
While there are a handful of other cryptocurrencies that offer unique possibilities, it should be remembered that Bitcoin is the longest-lasting cryptocurrency and has never been hacked.
Coins similar to Bitcoin
Aside from cryptocurrencies that work very different from Bitcoin, you can also look into cryptocurrencies that work in a similar way but with some key differences.
By this, we mean cryptocurrencies that are simply made to facilitate transactions. They may have some features that theoretically make them better than Bitcoin.
A key cryptocurrency to look into would be Litecoin because it is very similar.
Litecoin is faster which is one of the most sort-after features people want from Bitcoin. It also has a limit of 84 million coins, which may mean it can outlast Bitcoin as well.
But then why is Bitcoin more popular?
Simple, it is more well-known and had a better head start.
Further to that, it is one of the few cryptocurrencies already delivering what was promised. Its white paper was written after the coding was done.
We can already see it working, many people are already trading it and some vendors are accepting it as payment.
It is already been used by many people and its solution to financial problems is simple.
It is also worth looking into Bitcoin’s key rivals, those that have been created specifically to overtake Bitcoin; Bitcoin Cash and Bitcoin SV.
Coins very different to Bitcoin
There are also some cryptocurrencies very different from Bitcoin, using alternatives to blockchain technology. You can also hedge your trades with these as well.
Take advantage of stablecoins
Stablecoins are cryptocurrencies that are tied to the value of something and are much less volatile than regular cryptocurrencies.
Perhaps the most well-known example of this is Tether, a cryptocurrency that is 74% backed by US dollar reserves. At the time of writing, it is the 7th largest cryptocurrency by market cap.
That said, there is plenty of controversy surrounding Tether and so stablecoins should not be viewed as an investment without risk.
The reason stablecoins can be useful is that they are easier to move around than converting Bitcoin back to your chosen fiat currency and can be cheaper.
It is much easier to use them when moving value from one exchange to another.
You can use stablecoins to move your Bitcoin when volatile market conditions appear to be emerging. Hold them there until the volatility is over and buy Bitcoin again.
What to look for when diversifying a cryptocurrency portfolio
Diversifying your cryptocurrency portfolio can be a hard thing to accomplish.
It is a hard industry to appropriately diversify in because the majority of cryptocurrencies are very risky to invest in.
As mentioned earlier, most will not achieve what they are aiming for.
An important thing to bear in mind is that the majority of the materials you will find online are in actuality marketing materials, no matter how technical they may appear at first.
These materials are largely made up of difficult to achieve promises that most likely will not happen.
To conduct proper research, you need to be able to read the code and understand how it works.
This is not something everyone can do, but it is the best way to learn how something works and if it is worth your time investing in.
If you can’t read code but want to invest in cryptocurrency and need to be sure a cryptocurrency is worth the risk, you ideally should consult someone who does.
Don't diversify just for the sake of diversifying.
Do your research and be sure it is a wise investment. If you don't fully understand what you are investing in, it may be an even worse idea. You have to be sure about what you are doing.
You can also check the Weiss Crypto Ratings to get a good sense of which cryptocurrencies are performing well in terms of tech adoption and risk-reward.
If you remember anything from this article, make it these key points.
- Diversify your portfolio. Don’t just trade Bitcoin or one specific cryptocurrency, trade other cryptocurrencies that you see have potential.
- Look at cryptocurrencies very different from Bitcoin. For example, cryptocurrencies that aim to do very different things.
- Explore cryptocurrencies that are similar to Bitcoin. For instance, cryptocurrencies that are aiming to do something similar and may have an edge over Bitcoin.
- Take advantage of stablecoins. You can use them to protect your funds in the short term.
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