“Successful investment is about managing risk, not avoiding it” said the famous American economist Benjamin Graham. Investing is indeed a risky game: only those who can effectively manage this risk can win it. And when it comes to managing risk, diversification is key.
This is true for all asset classes, but even more so for digital assets like cryptocurrencies due to their extreme volatility. Prices of digital assets typically fluctuate several times a day, and investors who depend on a single asset are, more often than not, susceptible to high losses due to the whims of the market. On the other hand, investors whose equity is spread across multiple digital assets are generally able to weather these storms, and reduce the magnitude of losses incurred if the market goes south.
In this article, we will dive into the importance of portfolio diversification, and how ExpX Finance is making it a cakewalk for investors.
Managing the Riskiest Asset Class
On April 14th, 2021, the price of Bitcoin touched its all-time high (ATH) of $64,863, creating massive waves of excitement throughout the investor community. But then came May, and the price of Bitcoin plummeted to $34,770. This is a price drop of almost 50% within a span of a month. Imagine the plight of investors who were solely invested in Bitcoin!
In the same time frame, however, Polygon’s MATIC token went from a mere $0.34 in April to an ATH of $2.68 in May. Now, for an investor who had both Bitcoin and MATIC in their portfolio at comparable investment values, the losses incurred by Bitcoin would have been balanced out by the massive increase in MATIC, reducing the magnitude of loss.
This is a basic example of why portfolio diversification is crucial. A well-diversified portfolio that balances promising crypto assets with more traditional stablecoins will not just mitigate risk, but also capitalize on the profits.
Rebalancing to the Rescue
Simply diversifying your portfolio is not enough, however. For a diversified portfolio to be performing as best as possible, it needs to be rebalanced from time to time – ideally as often as is practicable. Rebalancing means that the asset values within the portfolio need to be adjusted to ensure that they remain at desired weightages against other assets. If asset values fluctuate too much from their original weightages in the portfolio, the portfolio once again becomes susceptible to sudden losses.
This process of rebalancing a portfolio is expensive, time-consuming, and ultimately one of the main reasons why investors refrain from diversification. But, as we’ve established before, not diversifying has serious consequences. To save investors from this catch-22 situation, a new solution has emerged called the Expx Finance Protocol.
On the surface, Expx Finance seems like any other DEX that allows swaps, liquidity mining, and trading of different assets, However, unique differences and advantages become apparent upon digging deeper.
For starters, it is built on the Binance Smart Chain (BSC). This means no network congestion, very quick transactions, and minimal gas fees. Next up, ExpX allows the creation of pools containing up to eight different assets within a single pool. An excellent way for investors to easily diversify their portfolio without jumping from platform to platform in search of high-yielding pools.
Finally, the ExpX Protocol is designed in such a way as to ensure that the assets in these pools always remain at the weightages initially assigned to them. This means that the portfolio is rebalanced automatically, allowing pool creators to ensure their crypto holdings are always performing optimally in a real-time market – all without any manual input!
Complex portfolios with frequent re-balancing used to only be available to large, veteran crypto players – now, through use of the ExpX Protocol, any investor has access to these important tools for improving the efficiency and effectiveness of their holdings.
Making the Most Out of Crypto
Though cryptocurrencies have grown exponentially in the past couple of years, mainstream adoption still remains in the future. This is mostly because of the volatility of assets, and the risks that come with that. However, traditional brokerages are coming to realise that a sound investment strategy combined with a well-diversified portfolio is all you need to make the most of this space, similar to any other field. In this context, ExpX Finance’s eight asset pools and automatic rebalancing features could really help traditional investors get on the crypto bandwagon, and seize the opportunities that await them.