This article is a guest post. The world of investment is governed by many rules. These are the rules that determine whether you will make any profits from your investments. The same is true for cryptocurrencies, where you can either make good money or end up losing all your money, depending on how well you follow these rules.
Today, we will talk about one golden rule of investment – “Never put all your eggs in one basket”.
So, what does this rule mean and what is its significance in the respect of cryptocurrencies.
Let’s try to find out.
Never put all your eggs in one basket
Irrespective of whether you are investing in cryptocurrencies or any other place for that matter, the line above means – never invest all your money in a single product or commodity.
Now, you must be having many questions as to why not and what does it even mean. Let’s take them one by one.
What does it mean that you should not invest all your money in a single project?
Well, have you ever heard of the term ‘diversification’? It is the act of diversifying something across multiple things. In the investment space, the term means diversifying your investment portfolio to have multiple projects or coins. In other words, divide your funds across multiple products rather than investing all of it in a single product.
For instance, if you have, say, $1000 to invest and you want to earn good income (almost double) in a year or so, then you have two options – you can either purchase a single commodity like shares or property or Bitcoin from all your money or you can divide it such that you spend on different types of commodities.
In the crypto investment space, it will mean that rather than putting all your money in buying a single popular cryptocurrency such as Bitcoin, you will instead diversify your portfolio across multiple coins, including altcoins.
Now, let’s talk about the benefits.
Why should you not put all your eggs (money) in one basket (coin)?
The simple answer is – to minimize the risk.
One of the most basic facts of the investment space is that the higher the rewards, the higher the risk. Diversification is an act of minimizing your portfolio risk by distributing the risk. Here’s how.
Suppose you have $1,000 that you want to invest in cryptocurrencies. Now, you can either put all the money in a single coin like bitcoin or you can invest in multiple ones. Here are the two scenarios.
In scenario one, you put all your money ($1000) in Bitcoins. The rewards/ROI of bitcoin is very high, but so is the risk. There is a good chance that you will make nearly double your investment in, say, a year. But there is also an equal chance of you ending up with half of your original investment if the coin price drops.
In scenario two, you put half of your money in Bitcoins, and the remaining half you distribute across other not so popular altcoins. The benefit of investing in altcoins is that there is not much risk involved with them. Even if the price of these coins does not hike significantly, it will also not drop greatly.
When you invest in these altcoins, you can be assured that your money is safe. Even if your bitcoin investment ends up in a loss, you’ll still have the remaining amount that you invested in altcoins.
I hope by now you have understood what the phrase “Never put all your eggs in one basket” means and why it is important in the crypto investment space.
Author Bio: Amit Gupta is the CEO and founder at SAG IPL, an India-based technology firm providing a range of service/software solutions in the web development, design, app development, and SEO industries.