OWNING 20+ COINS ABOUT DIVERSIFICATION
Not long ago there was an intense discussion around Twitter about the purpose of diversification that divided “chads from bagholders”. I thought I would take this opportunity to explain this topic from a more rational POV, as most of the arguments did not really hint at what really are the pros and cons of being heavily diversified in crypto.
Before we begin, let’s show 2 sides of this discussion on Twitter:
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” — W. Buffett “
“The most successful traders in this space that I know have at least a hundred bags or more. All of them.” — @Mansa_Godson”
Whether you decide to go with the “chad” or #ihaveabag you should first understand what comes with each side of this argument. Sadly, there is no one correct way of dealing with this topic, as everyone’s risk tolerance and available time forces to play it differently. In this small article I will present all the nuances of both strategies so that in the end you can decide which way seems more suitable for your needs.
The level of diversification depends on 3 main things:
- Size of portfolio
- Style of playing
- Types of coins
Let’s go through all of them one by one with a small summaries at the end.
Size of portfolio
Obviously, if you own a large portfolio (this is pretty subjective but let’s say you do not have problems with throwing 1 or 2 BTC at shitcoins) you know that being diversified into 2–3 coins is often very risky due to low liquidity. Unless you are planning to play this way with higher caps, having 15–20% daily swings on your whole portfolio is not necessarily something your Blockfolio wants to see. That is outside of the fact that for many people it is impossible to go deep into such a small amount of coins without crashing that certain market.
From the profitability POV it is true that less is more. The smaller your number of positions is, the more your portfolio will appreciate in value when they start moving. If you want to quickly double your money you will not bet on 20 coins doing 100% at the same time — you will bet on 2 or 3 doing it in a lot shorter time frame. Even if among those 20 coins there is a one huge winner there are high chances that those gains will still be incomparable due to a much lower amount of money allocated in that currency. It’s hard not to see the potential of running AntShares or XRB as one of your main positions from the bottom to the top, instead of having 1% of your portfolio in it.
This however comes with a price of a bigger risk exposure. As coins are extremely volatile and often prone to dumps on FUD, you can never know when one of your main positions suddenly goes to crap (look at the latest $SHIP issue with SEC letter that will probably turn into a non-event, but at the moment of an announcement it absolutely crashed the price). This is the main reason why people are preaching to be more diversified — even in a fundamentally strong coins there are events that you cannot predict and there is never a guarantee that the price will recover. Imagine having your whole multi-million $ portfolio allocated in only few coins with one of them suddenly being met with $SHIP situation. You priority is such case is not to maximize your gains but to have a steady growth that is not disrupted by a single incident. The correlation here still works — the more bags you have the less exposed you are to random events, but your gains are also a lot less significant.
- Smaller portfolio — fewer coins to maximize gains. Good research necessary to avoid potential dumps on events.
- Bigger portfolio — more positions to minimize volatility. Relocate gains from the already pumped coins to the unpumped ones to increase profitability while still keeping low exposure to risk.
Style of playing
You can throw away your chad talk about being poor when holding a lot of bags. Not everyone in crypto tends to swing trade their alts, and believe it or not there are HODLers out there that are probably more successful than a lot of the people reading this article (mostly those over-trading). If you are going to give an advice to somebody, at least do not throw all the traders into one bag.
As mentioned in the example in the beginning, managing a lot of bags can be time-consuming to say at least. There is almost no way to really be up-to-date with development of every one of 50 bags at all times. There is also no need for that.
Some people play cycles and trade the news while others buy alts and forget about them for months or years. While the first group maximizes the potential in their trades, it requires a lot more time from them, which is not always available for others. Investing very long-term is met with an enormous opportunity cost (holding through market cycles and missing out on easy gains) but for people that do not have time to actively trade, those short and midterm swings do not matter that much. The work is being done before buying (solid research) and then the coin is being left until it gives good returns back. This approach is not bad — it is simply different, and with so many different currencies in different sectors betting on many of them at the same time is justified. A good pump is always a mixture of good fundamentals and a little bit of luck, even if the coin is obviously undervalued. Not all good projects get appreciated, so increase your chances by betting of few them.
However, if you are trading full-time there is no reason why you should go through cycles with multiple positions without optimizing your portfolio. Majority of alts are having their movements correlated with BTC price. If you own a lot of bags then it doesn’t matter if you are less prone to black swans and FUD — you will still suffer similar losses to the next guy with 5x less bags than you because most of the alts retrace at the same time. A lot of bags = way longer time of reaction in case the market crashes (not to mention the illiquid positions that would have to be sold for a loss).
- Fewer positions allow to react quicker to market events and to maximize gains with selling when the pump is over.
- Too many of them will make you vulnerable especially if you plan on swing trading. More positions are better for patient investors as they reduce all the noise of short and midterm moves. A big opportunity cost of not acting on the prolonged downtrends, but the chances of catching a big gainer are higher. Crypto is filled with undiscovered 100x runners.
Types of coins
A very important aspect that people are often ignoring is the type of coins that people are bagholding. Vast majority of alts as we mentioned are heavily depended from BTC, but that is not the case for all of them. Low caps (we can call them this below 5M cap, but the real low caps, for me at least, begin below 1M) very often tend to act as a separate market. They do not act on BTC dumps or pumps as the distribution and liquidity are a lot different from regular alts. A lot of coins are only traded OTC and even if they are on smaller exchanges, people are less willing to crash the market while losing huge amounts of money by themselves to panic sell on current market movements. Those coins move in their own terms that shouldn’t be compared to top 100 alts. Since they are usually in extremely early development stages, it is also hard to predict when/if one will ever actually moon. In those cases being heavily diversified has different consequences = more chances for a big gainer but also bigger risk exposure.
Additionally, you cannot really have a huge position in only few coins, because there is not enough supply in most of them, so going chad here is rarely possible. That is why I am focusing mostly on the subject of having multiple positions in low caps.
Like in regular alts having more bags meant that even if one died you were still covered by other positions, here it works a bit differently. Of course one good pump more than covers all your other positions since here catching 5x is like cashing out 50% on a Binance alt. However, the chances of a coin dying (or exit scamming) are a lot higher than on regular currencies. When in case of a bad trade you would usually take a loss of 20–30% on a coin, in case of low caps you are often seeing -50/60% in a matter of only couple of days or even completely losing them if a dev leaves the project. Being diversified in many position does not make your portfolio more stable — it makes it very volatile and it requires a lot of good research and patience to really take advantage of playing low caps.
- It’s incredibly risky to have your whole portoflio in few low caps (if that is even possible to do). Depending on the size of the bets it might be not even possible to cash out all the gains without dumping the coin’s market.
- Lowcap market is different from regular alts and can serve as a good hedge. More bags, considering maximum position size is limited, can be extremely profitable as most pumps are really massive, but it comes with a big risk. “More bags = less volatility” does not really work here.
There are pros and cons to both being a bagholder and sticking to lower amounts of positions. The following conclusion is the part of my book from the portfolio management chapter, that I think gives the best understanding on how a one should decide on the amount of coins they want to hold. I am also touching here the subjects of % between core positions (BTC/ETH) and alts that is often missing from the discussion that was being made on Twitter. Enjoy!
Article written by Cryptorangutan
Follow him on Twitter for news and updates.