“Diversification is for Idiots”: Does it Apply to Cryptocurrency?
Tags: Diversification, Cryptocurrency, Warren Buffett, Bitcoin, Altcoins

“Diversification is for Idiots”: Does it Apply to Cryptocurrency? faast Follow Mar 20 · 3 min read

Image credit: FX Empire

Conventional investing wisdom says that people should diversify their investments. However, some of the most successful investors in modern times have challenged this view. This has led to an interesting debate about investing philosophy, and with the rise of cryptocurrency, it is a question worth revisiting. Is diversifying a cryptocurrency portfolio a good idea, or as Mark Cuban once put it- is “Diversification for Idiots”?

The Case For Diversification

Let’s face it- there’s a lot going on in the crypto space at any given time. There’s so much information, much of it contradictory, that it can be hard to know what to do. The wild fluctuations in many altcoins are a reflection of this uncertainty. Some advocate a diversified portfolio as the only sensible way to proceed under these circumstances.

The argument for diversifying investments is simple: it’s too risky to put all your eggs in one basket. Putting money in multiple projects will spread risk around. Some of them will succeed, while others will flounder. In this way, you can hopefully get decent returns and minimize losses.

If you’re interested in getting some exposure to cryptocurrency, but don’t have a very deep understanding of the industry or the technology, this approach might make sense. As Warren Buffet once put it, “diversification is protection against ignorance.”

As cryptocurrencies gradually gain more mainstream acceptance, it is likely that diversification solutions will become more popular, just like index funds in the stock market. Crypto ETFs and products like Ember Fund would be a good example of this (note: Ember is a Faast partner).

The Case Against Diversification

For investors like Mark Cuban and Warren Buffet, the case against diversification is equally simple: by diversifying, you’re basically admitting that you don’t really know what you’re doing, and are just throwing stuff against a wall and hoping some of it sticks.

Their approach involves doing a ton of research into a startup or an established company’s fundamentals, such as revenue, free cash flow, and the competitive advantages it holds over other companies in its industry. Then, and only then, do you make a decision.

Buffet himself is notorious for being very conservative and only putting money in a small number of well-chosen stocks. If a stock doesn’t meet his very strict requirements, or the company is part of an industry he doesn’t understand, he simply doesn’t invest. The majority of his portfolio consists of only a few companies like Coca-Cola, American Express and Gillette- large cap, blue chip stocks that weren’t exactly going “to the moon” within the next year or so when he bought them.

If Warren Buffet were investing in cryptocurrency (he doesn’t, by the way) he would probably spend many hours reading white papers, researching the underlying technology, interviewing the teams behind the coins he was looking at…and after rejecting most of them, he’d put then billions of dollars in only 1–3 of them.

The bitcoin maximalists are an example of this approach. They only believe in one project and put all their eggs in that basket- because they have done their research and believe passionately that BTC is the only way to go.

What’s the Right Approach?

We’re not in the business of giving out financial advice- there are pros and cons to each of these approaches and everyone has to decide which makes more sense for them. But given that more than 80% ICOs turned out to be scams according to a study by Statis Group, it is probably not wise to completely eschew research.

If you are really excited by cryptocurrency but can’t or don’t want to spend a long time studying it, a diversified approach might be right for you. However, if you do invest time and effort into really understanding cryptocurrency, it is quite likely that you will be more selective about your investments, and only put your money in a few assets.

Regardless of which approach you choose, there is no better tool for building and managing a strong crypto portfolio than Faast. Get started today and enjoy the best non-custodial crypto tool available to the public.