Diversification is one of the most popular strategies among investors for improving resilience and capturing a broad range of market opportunities. However, for crypto traders, true diversification beyond the digital asset class introduces several challenges. Most notably, the complexity of engaging with TradFi platforms in addition to crypto exchanges to reach the target assets.
However, thanks to the increasing engagement of platforms like MultiBank Group straddling the digital and TradFi markets, traders now have more options for enhancing their portfolio diversity – without introducing additional complexity.
It hasn’t been an easy time for crypto traders and investors over the last year or two. Despite pockets of activity and the building anticipation over the approval of a Bitcoin ETF, the markets have been flatter than usual for most of the year. Unlike more bullish times, there are also fewer opportunities in the altcoin markets.
A key challenge for crypto traders is market correlation – most tokens tend to move in the same direction at the same time. Even a token with a killer use case cannot withstand a crash in BTC prices. Therefore, the only way to protect your portfolio against the notoriously fickle moves in the crypto markets is to diversify.
Diversification with Derivatives
As instruments that are based on other asset types, derivatives such as options or futures offer access to a wide array of different investment opportunities and, as such, make an ideal way to diversify a portfolio beyond cryptocurrency holdings.
Furthermore, there are other advantages. Derivatives offer exposure to assets without needing to own the underlying, meaning investors can gain exposure to markets in commodities such as metals or agricultural goods without storage issues. Derivatives also facilitate short trading, where investors speculate that the value of an asset will decrease.
However, they are most powerful as a diversification tool when used in combination to hedge risk. This is particularly important when taking out short positions since if the market moves in the opposite direction, the losses are technically uncapped as there is no upper limit on how far an asset can rise – a phenomenon known as a “short squeeze.”
Suppose an investor believes the price of a particular asset will go down in the next six months. They take out a short position, selling the asset with a plan to buy it back at a lower price. However, if the market moves against them, they risk being unable to sell and stuck in a losing position. So, the investor takes out a call option to guarantee that they can buy the asset at a given price before their losses reach a critical level.
One drawback of using derivatives to diversify away from crypto is that it can introduce a significant amount of complexity since it often means holding assets across multiple platforms. This can also create blockages in liquidity when moving funds around or incur excess charges in withdrawal fees.
However, the entrance of TradFi firms such as MultiBank Group to the crypto sector now cuts through this complexity by offering customers access to over 20,000 markets for digital and traditional instruments on a single trusted platform. MultiBank has established itself as the world’s largest and most regulated financial derivatives institution, with guarantees of compliance and security. The company has been in the market for 18 years and has built a global customer base over one million strong.
Along with deep liquidity and a state-of-the-art trading app, users can also take advantage of features such as copy trading the strategies of high-performing investors.
Finding Opportunities in Forex
In addition to crypto assets at Multibank.io, users can also take advantage of platforms like MultiBank group to further mitigate risk by diversifying into assets such as foreign currencies. While the US dollar is typically used as a reserve asset, the recent low interest rates make it less attractive, meaning some investors may consider other currencies. Commodity currencies such as the Australian dollar, linked to the nation’s gold exports, or the Canadian dollar, which benefits from Canada’s oil production, can be advantageous for investors wanting to diversify and hedge portfolio risk.
Finally, ETFs (exchange-traded funds) can provide a low-fee, relatively passive way to gain exposure to baskets of assets that track the performance of particular markets or indices. Similarly to derivatives, ETFs can be a low-hassle way of seeking out more exotic investments without needing to buy the underlying, so they provide an alternative for investing in physical commodities, stocks, or bonds.
With a diversified portfolio across multiple different digital and traditional assets and asset types, investors are better placed to weather storms in any given market. However, ongoing monitoring and periodical rebalancing are also key to mitigating risks and maximizing opportunities.
