September 04, 2018

Should You Buy More than One Type of Cryptocurrency?

Paper US money with a gold bitcoin and a not stating buy bitcoin

Should you buy more than one type of cryptocurrency?

The answer is, it depends entirely on what you want to do.

Broadly speaking, there are two reasons to purchase cryptocurrency: as spending money, or as an investment product. How many currencies you should hold depends on which you prioritize.

(Note: This is aside from buying utility tokens. These, you buy to use the ecosystem of a platform like Patron or Gameflip. They are not cryptocurrencies and are a separate issue entirely.)

Cryptocurrency as Spending Money

If you want spending money, then the question is a little bit like asking “how many kinds of dollars should you buy.” The answer is one. You should focus on one type of cryptocurrency.

Currency for spending is a tool, one that doesn’t improve with diversity. By spreading your assets across a range of cryptocurrencies, you have less of any given one. You reduce your spending power while at the same time making it more likely that you’ll have to move money among currencies in the future. That will run up transaction fees, making each purchase more expensive.

Instead, focus on a currency that works best for your intended spending. If you’d like to use cryptocurrency for buying direct goods and services, you may want to reach for Bitcoin or Bitcoin Cash. As the most widely accepted cryptocurrency in the world, Bitcoin will let you buy more cups of coffee than most any other you could choose.

On the other hand, if you’re interested in buying technology, tokens, or ICO funding, perhaps consider Ethereum. It has become a widely accepted currency for buying into new projects and is an excellent choice for someone who wants to buy and spend in this industry. Regardless, your best approach would be to identify your specific needs and find the currency that’s right for you.

Computer screen showing market data

Cryptocurrency as Investment

Then there are the investors. For them, here is a quote from Fidelity:

Diversity is at the core of your daily life—and it's just as critical to your finances. 

Diversification in investing is the practice of spreading your investments around, resulting in 3 core benefits: 1) minimizing risk because your exposure to any one type of asset is limited; 2) avoiding short-term mistakes by lowering fluctuations that can be caused by a single asset; and 3) earning long-term value by capturing gains from a bunch of assets.

You should always, always, diversify your investments. Cryptocurrency is no different.

If you don’t believe it, just recall what happened to everyone who bought in at Bitcoin 20k. Thousands and thousands of investors around the world lost money as the near-eponymous cryptocurrency has price-corrected over the past several months, with one estimate placing the losses around $87 billion. Those who put all their eggs in the Bitcoin basket have taken an absolute beating in this market, but what about those who diversified?

They probably did all right. Certainly, Bitcoins have lost value since December, but cryptocurrencies overall have been far more stable. Investors with a range of assets have been able to smooth their losses, if not outright recover them through offsetting gains.

This is a core principle of investing at absolutely all times. Diversify your assets. Buy multiple cryptocurrencies. Put some money into exciting, new projects while keeping other sections of your portfolio dedicated to the stable currencies that will simply keep ticking. Perhaps even seek out some of the new cryptocurrencies pegged to the dollar for well-regulated (if minor) growth.

You’ll make less money when one cryptocurrency explodes in value, but you’ll more than make up for it when a currency tanks.

That’s a rule as old as investing itself. 

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