Updated: March 19, 2025 by Michael Kahn. Published: March 19, 2025.
Every crypto investor knows the importance of a well-developed portfolio, but achieving it is full of obstacles. Overcoming investment biases, for example, is the most difficult. We’re often prone to overconfidence bias, which makes us believe we can perfectly predict the future of the market, or to regret aversion, which happens when we regret holding underperforming assets and abandon our strategy.
At first glance, approaching portfolio diversification seems straightforward. You invest in cryptocurrencies with high-market capitalization, such as ETH/BTC, along with other different types of tokens and adjust assets based on market conditions.
However, there’s more top market cap than it seems, and you must also craft an appropriate technique based on your risk tolerance. Therefore, while following other people’s portfolios can guide you, copying them is not efficient in the long run. So, here’s how to do portfolio diversification right.
Table of Contents
Learn the importance of market capitalization
Cryptocurrency market capitalization is one of the first features to look into an asset before investing in it. It comprises the total value of all the coins users have mined, and you can calculate it by multiplying the number of coins in circulation by the market price of one coin at the given date.
Generally, investors use it as a gauge of how stable a cryptocurrency is likely to be, even if it experiences volatility. That’s why Bitcoin and Ethereum are considered the most stable assets on the market― they’ve achieved considerable market cap values. Introducing them to your portfolio can help you navigate changing market events. Conversely, cryptocurrencies with smaller market caps are less safe.
Identify market cap categories
Market capitalization is an important factor that can showcase a cryptocurrency’s growth potential. You’ve got three categories to focus on:
- Large-cap cryptocurrencies earned stability over time, and they usually fit between $1300 billion and $390 billion. They are low-risk assets and provide high liquidity. Bitcoin, Ethereum and XRP are leading the large-cap market;
- Mid-cap cryptocurrencies have a lot of investment potential but come with risks since they’re not established assets. These coins have a market cap between $1 billion and $10 billion, such as Litecoin or Monero;
- Small-cap cryptocurrencies are the least safe assets, with a market cap of less than $1 billion. They’re usually new on the market or lack use cases, like meme coins, so they’re prone to dramatic price swings;
Users will always create new crypto projects, whether they consider developing unique use cases or better community-driven assets, which is why there are so many small-cap coins on the market. However, their value doesn’t overthrow large-cap cryptocurrencies, which is why you must prioritize them in your portfolio diversification strategy. Mid-cap coins should also be included for vast investment opportunities, but be careful when adding small-cap cryptocurrencies.
Consider trends for picking coins with potential
Besides technical features, watch out for trends when choosing reliable cryptocurrencies because they can drive further development in the industry. Therefore, projects tackling these technologies should be a sign of promising opportunities for your returns:
- Web3 integration. Decentralized applications and smart contracts will become the main drive for Web3 adoption, so cryptocurrencies focusing on it are important;
- DeFi expansion. Decentralized finance is the opposite of traditional financial systems, so they’re more efficient for lending, borrowing and earning yield;
- Institutional involvement. Cryptocurrencies used by financial institutions provide an additional layer of safety for investors and traders;
Don’t rely on trends too much, as they can change quite fast. However, when it comes to Web3, DeFi, and institutional adoption, cryptocurrencies present in these areas will be relevant for some time.
Balance coins by market cap
While it’s generally a good idea to invest more in large-cap cryptocurrencies and less in small-cap ones, you’ll have to learn to rebalance the portfolio from time to time. This means closely analyzing the assets’ condition and performance on the market, individually and collectively, to see how you can improve the allocation.
For example, during the altcoin season, Bitcoin is overpowered by the value of the most potent altcoins on the market, making it an ideal period to expand your altcoin investment. This is the best time to look into projects that focus on DeFi, GameFi or even AI technology.
This season starts showing when Bitcoin’s dominance declines in a span of a few months, and an increasing number of altcoins projects come with new improvements in their technology. At the same time, the hype for altcoins is fueled by media attention and positive sentiments.
Evaluate coins based on their sector representation
You could also diversify your portfolio with sector-based coins that provide more value and variety. For example:
- Store of value: Bitcoin, Maker, TrueUSD;
- Smart contract platforms: Ethereum, Solana, Polkadot;
- DeFi tokens: Chainlink, DAI, Avalanche;
- Privacy-focused coins: Worldcoin, Monero, Dash;
Industry-based cryptocurrencies are easier to track since you can efficiently keep up with the news. Indeed, they can be unpredictable due to new management, regulations, and trends, but they’re also strong competitors in the market.
The team and leadership of a crypto project are also important to follow since they’re the first to post updates. Social media is the best way to keep up with such changes in crypto, as developers like Vitalik Buterin, Ethereum’s creator, are used to posting on social media when challenges or updates arise.Â
At the same time, these industry-based coins are usually the first to make fundamental changes in their infrastructure by exploring new technologies. Worldcoin, for example, offers community grants for users who have the talent to contribute to the project with new proposals. The grants focus on World ID applications, digital identity solutions and governance innovation.
Ready to diversify your portfolio?
Portfolio diversification is vital for every investor and trader because it offers support against volatility and opens the door toward return opportunities. However, going beyond biases and fears impedes some from spreading their assets efficiently, which is why they can have a more technical approach. This includes choosing the diversification system based on market capitalization, industry-based coins and technology trends.
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