A primary competitive advantage offered by PrimeXBT is the unrivaled portfolio diversification options that investors and traders can choose from.
With more than 100 different trading instruments across crypto, stock indices, commodities, and forex currencies, the combinations are nearly endless.
In this guide, we will outline several different portfolio diversification strategies that traders can take to mitigate recession risks and keep capital protected during a downtrend.
What Is Portfolio Diversification?
The concept of portfolio diversification aims to spread capital around to achieve a desired balance or result, keeping exposure to any one specific asset or position to a minimum. Various portfolio diversification strategies exist — some are geared toward aggressive capital growth, while others are focused on protecting capital.
Before selecting which assets and positions will make up a portfolio, investors and traders must examine any positive or negative correlations, analyze the trend of each asset, and carefully consider the macro environment. For example, in a recession, risk increases in a portfolio heavy on the long side of crypto and stock indices.
The stock market is well in bear market territory and on track to rival the 2008 Great Recession and the Wall Street Panic of 1929. Bitcoin and other cryptocurrencies are down by as much as 74% or higher. Proper portfolio diversification, in this case, would include hedge short positions in crypto and stocks, in addition to long positions in currencies in the USD side of trading pairs.
Portfolio Diversification Strategies
There is no perfect portfolio setup or allocation for everyone. Individual needs, risk appetite, capital levels, growth goals, and more must be taken into consideration when creating an investment or trading portfolio. However, here are some examples of common portfolio diversification strategies:
Dollar Milkshake Theory
When the United States Federal Reserve tightens rates faster than other central banks, all the global liquidity created by lenient monetary policies begins to pour back into the dollar due to its status as the global reserve asset. This trend has shown little sign of stopping.
Dollar dominance can be used to your advantage by being long the USD side of forex currencies or short any currencies or assets trading against the dollar. Short positions have been the most profitable for traders over the last year as the dollar devastates everything in its path.
Short Risk Assets
Even if you didn’t sell on the way down, there is no need to do so. Investors can balance out a spot crypto portfolio with hedge positions. Investors with long-term positions in stocks can short major stock indices to hedge against the stock market collapse.
Long and short positions give traders the flexibility to choose which side they need to be on, depending on the trend—going short during crypto winter and flipping long when summer returns can prove to be a profitable strategy. Hedge short positions also come in handy during uptrends to hedge long positions and profit from pullbacks.
Go For Gold
Although this stage of the recession hasn’t kicked in just yet, primarily due to dollar strength since gold is quoted in strengthening dollars, but gold typically is the best capital protection a portfolio can provide. Gold is the original safe haven asset, which saw strong performance in the 1970s inflationary environment and again heading into the 2008 recession.
Other precious metals like silver and important geopolitical commodities such as oil and natural gas also have a place in a portfolio when macro risk increases. Commodities show a lower correlation with crypto than other assets like stock indices.
Covesting Copy Trading
PrimeXBT also lets users become followers and automatically copy the trades of top-ranked strategy managers in the Covesting copy trading module. The peer-to-peer copy trading community includes transparent leaderboards where all traders are ranked by profits and performance.
Top-ranked traders currently have as much as 4,000% in all-time profits during an extended bear market and crypto winter. Followers can build a portfolio of traders by following many skilled traders at once and beat any market benchmarked by a large margin.
PrimeXBT margin trading tools are powerful on their own, but when combined with more than 100 of the hottest global markets today, anyone of any experience level can get their portfolio in check and well diversified. Using the PrimeXBT mobile app, users can stay on top of long and short positions across all asset classes and keep a portfolio in the green no matter when volatility strikes. For complete capital protection and unrivaled portfolio diversification opportunities, there is no better place to be than PrimeXBT.