How to Diversify in a Market Based on Volatility

Authored by Makara
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Makara

Published July 1, 20218 min
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When you start investing, the three best (and likely most common) words of advice you’ll hear are diversify, diversify, diversify. Harry Markowitz, the man who came up with the idea at the age of 24—and eventually won a Nobel Prize for it—explains it this way: Don’t put all your eggs in one basket. By investing in different types of things, you reduce volatility and all without sacrificing returns. As simple and logical as that is, it can be a hard lesson for people to stick to. After all, if you’re excited about something, it’s tempting to concentrate your investments in that particular area. If your bet pays off, it pays off big. But there is, of course, an equivalent downside. With no other holdings, if your single asset tanks, your portfolio is going with it. Diversifying your investments is among the best ways to mitigate risk in any portfolio. It’s an important part of traditional investing, where you want a balance of things like small- and large-cap stocks, mutual funds, bonds, index funds, and gold. You’re putting some safe bets (gold) in with the risky ones (futures). But what about crypto, where your choices are risky, riskier, and riskiest? Volatility is a feature of cryptocurrency, which means diversification is more than just important. It’s essential.

In the past, diversification of coins was also a headache. If you wanted to invest in multiple assets, you had to first research them, then find places to buy them, then manage all of your various holdings across a myriad of wallets. And when it came time to rebalance your portfolio—making sure you still had the balance of exposure you wanted after changes in the market—the process started all over again, as you were forced to buy or sell each individual coin to get back to your desired allocation.

It was a time-consuming (and, honestly, pretty annoying) practice. And it’s exactly why we decided to introduce the concept of baskets. These carefully curated groups of crypto assets have diversification built in, giving you broad exposure to the market, but with no real effort on your part. All you have to do is answer a few questions about your goals in the app and we’ll suggest the baskets we think are best suited to you. (Of course, you can always ignore our advice and choose your own. We won’t be offended.)

Right now, we have six basket options, and we’ll be adding more in the future. You can invest in as many as you want, with whatever percentage of your portfolio dedicated to each you want. Here’s a brief summary of each. For more information, click here.

Decentralized Finance

A group of digital assets that provides traditional financial products—like asset exchanges, loans, derivatives, and savings accounts—outside of traditional financial institutions and with no middlemen. It’s more aggressive than other options.

Inflation Hedge

An equal-weighted allocation between tokenized gold (a cryptocurrency that represents physical gold reserves, typically one gram per coin, and records all transactions on a blockchain) and Bitcoin.

Universe

This basket’s assets span the entire investable universe of the Makara platform. It’s a relatively conservative choice, providing broad exposure to every sector, including currencies, NFTs, and decentralized finance.

Blue Chip

The equivalent of traditional blue chip stocks like IBM and AT&T. These coins have a high market cap and are the most established options on the Makara platform.

Bitcoin

A basket of one, giving you direct access to the industry’s original, biggest, and most notable cryptocurrency.

Ethereum

Another basket of one with crypto’s second-most notable coin. This basket is recommended for investors interested in the future of decentralized applications.

To respond to moves in the market, the assets included in each basket, along with the portion of the basket they make up, are adjusted once a quarter. And while the whole point of each basket is to diversify your crypto holdings, nothing prevents you from investing in multiple baskets—and effectively diversifying your diversification.