You have heard that phrase don’t put all your eggs in one basket right? If you crash the basket, all your eggs would be gone. But if you store your eggs across different baskets, if one basket crashes at least not all your eggs would be gone. In crypto investment it is always advised to do same when investing and we call it diversification. Diversification is investing on different assets just to make your liquidity safer. For instance, if you have $1,000 and you share your money across 10 assets, that would be $100 on each asset. If an asset goes to zero you will still have $900 remaining which is way better than you invested the whole money on that one asset. But if the assets goes up 300% you would have $1,300 because you just made $300 on the asset which is 30% of your total capital.
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But the human greed in us will not allow us be grateful for that, instead we would dwell on the possible gains we would have gotten if we had invested all $1,000 in that particular asset. Forgetting that the goal is to preserve the value of our capital rather than focus on making more unrealistic gains. Diversification is very important because it is one of the best ways to balance your risk to reward so as not to lose a lot. It’s also advisable to choose crypto assets across different chains when diversifying just to be safe. For instance, those who invested their money on LUNA/UST and some projects on the chain, lost their money when the chain malfunctioned and the assets lost their value.
While diversifying is good, over diversifying also has its disadvantages. One of its disadvantages is that while it’s a good way to manage risks and minimise risk, it can lead to minimum returns. I think we all know why it’s so, higher risks lead to either higher losses or higher rewards. While lower risks lead to lower loss or lower reward. So when you over diversify it’s like putting all your eggs in plenty different baskets you can’t control. You might forget a particular basket, won’t know when your egg hatch and the chick runs off.
