What is Diversification

Diversification is a risk hedging technique employed by investors where they invest in various independent projects and assets within a portfolio.

The objective of diversification is to balance out the wins and losses of assets performing differently within the same portfolio, thereby mitigating risks.

Diversification can be achieved by investing in uncorrelated assets, or at least not entirely correlated. This can be done by investing in diverse asset classes such as stocks, bonds, commodities, etc. But it can also be done by investing in different industries and markets, foreign or domestic. Diversification although limits risks, it at the same time reduces short term profitability.

In the cryptocurrency context, diversification is realized by investing in several digital currencies at the same time. The point is to invest in currencies whose value does not change in the same direction. For example, to diversify a crypto portfolio, if a user is investing in BTC, he/she should also invest in currencies that do not depend on bitcoin. This way, if the value of BTC drops, their value does not, and the losses incurred by the BTC price drop are balanced out by profits in the other digital assets.