SEC S17-W4 || Crypto Assets Diversification

Making decisions, especially financial ones requires careful consideration. Even something as simple as picking out today's outfit needs some thought beforehand. Who are we meeting? Where are we going? It's all about taking everything into account, including the situation, the impression we want to make, and the social norms around us. You can't wear a hoodie or sweatpants when you're meeting with business associates. Doing that is like saying "I don't care about looking professional or trustworthy." And it would be really weird if you showed up in formal wear for a workout, unless you wanted everyone to think you were Sherlock Holmes.

_{It is similar to financial decisions, we shouldn't rush to manage our assets unless we want them to vanish into thin air. Crypto, being the largest percentage asset in my portfolio, is always handled with caution or else my family and I might go hungry tomorrow. Our daily needs, kids school fees, and my coffee bills are mostly supported by trading activities since I resigned from my previous full-time job. Besides Steemit, of course! Image edited by Canva Pro}

Why is asset diversification important?

Asset diversification is something I apply to every investment I undertake. Regardless of the investment type I never put all my eggs in one basket because the risk is too great. If any of those assets were to collapse at any time, I still have several exit plans so my family wouldn't have to tighten their belts. Like any other type of investment, cryptocurrency is also an instrument with a high level of risk. Everything indeed has its risks, but my task is to minimize those risks as early and as small as possible.

I actually don't really have any special tricks when it comes to managing my personal portfolio. It is all based on experience and what I have learned from my seniors. But these days the diversification strategies I have been using seem to have their own names, and what is interesting is that from the journals I've been reading, these strategies have been scientifically tested, so they are worth applying to our portfolios.

Unfortunately, this time around, I can't reveal to you what assets I'm holding or trading on the market exchange because finance itself is part of my privacy. But I'll give you a brief summary of the asset diversification strategies I've been applying to my investments so far. Here are a few diversification strategies according to my version.

The asset diversification strategies I use

I myself use several diversification strategies, some of which I employ in diversifying crypto assets. These are what's known as the "Large vs. Small Cap Strategy" and the "Cross-asset Strategy". Among the two, I lean more towards the "Large vs. Small Cap Strategy," where it's all about diversifying assets based on the size of a coin's market cap. The larger the market capitalization of a coin, the more potential it has to become a stable asset to hold onto. Let's say the top coins on coinmarketcap.com, like BTC, ETH, BNB, XRP, DOGE, ADA, all of them have market caps above 200 trillion rupiah.

_{The screenshot of the crypto heatmap that I took from CoinMarketCap on April 30, 2024. It shows which coins are dominating the market}

The second one is cross-asset diversification. I have talked about this diversification strategy before when I participated in the SEC contest in Crypto Academy Season 16 Week 1. In that post, I compared two assets, BTC and STEEM as an example. I also did some calculation using the Pearson correlation coefficient formula to figure out how strong the correlation between those two assets is. The closer the number gets to 1, the stronger the correlation, and if it gets closer to 0, the weaker the correlation. That is why in the cross-asset diversification strategy, it is recommended to trade two assets with weak correlations simultaneously to reduce the risk of losses.

In simple terms, Cross-Asset Correlation can be understood as the relationship between two or more types of assets invested in a cross-sectional manner. Cross-asset itself involves the trading process of two or more assets simultaneously within a single platform. According to a publication in the Financial Stability Review, it is stated that investors have the potential to decrease portfolio risk by combining assets that do not exhibit perfect correlation. - My own previous post

A lot of people are still scratching their heads trying to figure out the difference between cross-asset and multi-asset investing. It's like trying to find where one ends and the other begins (it's not crystal clear). When we talk about multi-asset trading, we're basically talking about trading different types of assets using the same systems, but each asset is traded separately. On the other hand, cross-asset is a method of diversification where two assets have a distant correlation. In cross-asset, when we buy coin A, we're selling coin B and vice versa.

Even though I elaborate on examples like BTC and STEEM in this post, in reality, it's not as simple as that. I use these two coins as examples because I typically use coins that are currently hyped for cross-asset trading. It means I only apply this strategy to assets that can be invested in the short term. For the long haul, I prefer to invest in large-market-capitalization assets.

How about STEEM?

_{Steem illustration from Canva Pro}

STEEM itself is part of my long-term investment. The reason is simple because STEEM is an altcoin whose movement is influenced by BTC. Like my previous calculations showed, the correlation coefficient between STEEM-BTC is almost close to 1, meaning both coins move similarly. Based on that consideration, I'm confident that STEEM remains a promising asset for long-term investment. Moreover, as a Steemian who has relied on the Steemit platform for my livelihood so far, I also keep my passive income assets in the form of Steem Power (SP). This is evidence of my seriousness that I believe this coin does have opportunities in the future.

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Thank you for taking the time to read my post

Have a great day

El-Nailul