By John Sarson, Sarson Funds
As the saying goes, “don’t put all your eggs in one basket.” This is especially true when it comes to investing, and it’s even more crucial when investing in the volatile world of cryptocurrencies. Family offices that invest in cryptocurrencies must understand the importance of diversification to mitigate risks and maximize returns. In this article, we will explore the strategies that family offices can use to diversify their crypto portfolios, including how to identify promising altcoins, assess risks and benefits, and build a diversified portfolio.
Understanding the Crypto Market
Before diving into diversification strategies, it’s crucial to understand the crypto market. The market is unpredictable and highly volatile, with cryptocurrencies experiencing significant price fluctuations in short periods. Moreover, the market is still largely unregulated, which presents additional risks. Family offices must be aware of these risks and take steps to mitigate them.
When investing in cryptocurrencies, family offices need to consider factors such as market capitalization, liquidity, and volatility. Coins with a high market capitalization are generally more stable and less risky, while those with low market capitalization can be highly volatile. Similarly, coins with high liquidity are easier to buy and sell, making them less risky. Family offices must also consider the volatility of a coin, as high volatility can mean higher potential returns but also higher risk.
Identifying Promising Altcoins
While Bitcoin is the most well-known cryptocurrency, it is not the only one worth your investment dollars. Family offices can diversify their portfolios by investing in alternative coins, or altcoins. However, not all altcoins are created equal, and it’s crucial to identify promising ones that have the potential for significant returns.
One strategy for identifying promising altcoins is to analyze market trends. Family offices can evaluate the team behind the project, the technology used, and the coin’s overall potential for growth. For instance, a family office might invest in an altcoin that has developed a new technology or is partnering with a large company. By conducting thorough research and analysis, family offices can identify promising altcoins and achieve substantial returns.
Assessing Risks and Benefits
Investing in cryptocurrencies presents significant risks and benefits, and family offices must assess them when building a diversified portfolio. One of the main risks is regulatory uncertainty, as governments around the world are still figuring out how to regulate cryptocurrencies. Another risk is the potential for fraud and scams, as the market is largely unregulated.
On the other hand, investing in cryptocurrencies can also present significant potential for high returns. Family offices can achieve substantial returns by investing in high-risk, high-reward coins. However, this approach must be balanced with investments in more stable and less risky coins to mitigate overall portfolio risk.
To illustrate the risks of investing in highly risky cryptocurrencies, imagine a family office that invested heavily in a coin that was later revealed to be a scam. The coin’s value plummeted, resulting in significant losses for the family office both in value and possible also damage to that family office’s reputation.
Building a Diversified Portfolio
Diversification is key to mitigating risks and achieving maximum returns when investing in cryptocurrencies. One strategy for building a diversified portfolio is to invest in both established and emerging cryptocurrencies. Family offices can invest in established coins such as Bitcoin, which have high market capitalization and liquidity, as well as emerging coins that have significant growth potential.
Another strategy is to invest in coins with different use cases. For instance, a family office might invest in coins that are used for payments, as well as coins that have a specific use case such as smart contracts or decentralized applications such as gaming, gambling, IOT or VR.
Diversification is crucial when investing in cryptocurrencies, especially for family offices. By understanding the crypto market, identifying promising altcoins, assessing risks and benefits, and building a diversified portfolio, family offices can mitigate risks and achieve maximum returns.
Family offices must conduct thorough research and analysis when investing in cryptocurrencies and consult with financial advisors to develop a solid strategy. By doing so, family offices can navigate the unpredictable crypto market and achieve their investment goals. If you are like many family offices and consider yourself a “manager of managers”, it may make more sense spending your energy evaluating the available managers in the crypto market and analyzing many of the same items at the manager level. Questions like, “is this manager managing risk well?” and, “are assets in the mangers portfolio diversified? Are there controls in place to maintain proper diversification?”
Disclosures: Not investment advice. It should be assumed that Sarson Funds or its affiliated managers hold positions in all projects that are discussed. It is not possible to invest in any project directly through Sarson Funds, Inc., or its affiliated managers. Any investment product offered by managers affiliated with Sarson Funds should be assumed to be only available to Accredited Investors and subject to the individual terms and conditions of that offering including but not limited to those eligibility requirements associated with U.S. Securities Regulation D, section 506c. Talk with your financial advisor before making any investment decisions or have them contact Sarson Funds directly at [email protected]