Benefits of diversity: A coin-flip reveals better bitcoin alternatives

It is safer to build a diversified basket of cryptocurrencies

With bitcoin crossing the $51,000-mark (at the time of filing), many cryptocurrency investors are now of the view that its valuation has got stretched. Many are now exploring other cryptocurrencies which have not risen as much, and which they believe offer greater scope for appreciation.  

According to CoinMarketCap, the global market capitalisation (m-cap) of cryptocurrencies is $1.54 trillion. While bitcoin is the most popular, there are around 6,000-plus altcoins (alternative cryptocurrencies) out there. Together, they account for around 34 per cent of the total crypto m-cap. Rashi Jaiswal, senior blockchain engineer, ZebPay, says, “Having more than one cryptocurrency will provide the benefit of diversification.”

Altcoins: Many cryptocurrencies have been launched after the success of bitcoin. According to CoinMarketCap, the top five cryptocurrencies by m-cap after bitcoin are Ethereum, Binance Coin, Tether, Polkadot, Cardano, etc. Ethereum, Ripple, Litecoin, Tether, etc are the ones that have been around for a considerable period of time.

Ethereum: It is the second-largest cryptocurrency by m-cap. It is built on a decentralised, open-source blockchain featuring smart contract functionality.

Nischal Shetty, founder and chief executive officer (CEO) WazirX, says, “Ether is a cryptocurrency of the Etherum blockchain. It is a brand new blockchain and not a bitcoin blockchain.”

Binance coin: It is the third-largest by m-cap. It is used to pay fees on the Binance Cryptocurrency Exchange. Jaiswal says, “Binance chain is picking up popularity among developers because it makes it easy to transact over their network.”

Litecoin: Litecoin is a lighter and faster version of bitcoin. Since it is developed on bitcoin’s original source code, it has many similarities with it.

Sumit Gupta, co-founder and CEO, CoinDCX, says, “It was primarily developed for low-value transactions and is efficient for everyday use.”

Ripple: It is not a blockchain-based cryptocurrency. It is used more by larger corporations which want to move large sums of money.

Tokens: Many companies have issued their own currencies called tokens. These can be traded specifically for the goods or services of the issuer company.

Shetty says, “If you want to create your own token, you don’t need to create a new blockchain. You can build it on an existing one. To create a coin, you have to create an entire blockchain.”

Start small: Those getting into cryptocurrency investing should go with bitcoin initially.

Namish Sanghvi, founder, CoinCrunch India, says, “It is the oldest cryptocurrency and there is more data backing it.” He adds that once you have understood how cryptocurrencies work, you may diversify into others.

A novice investor should start with a small amount, even as little as Rs 100 (fractional ownership is permitted). Exposure to cryptocurrencies should not exceed 5 per cent of your portfolio. Venturing beyond the top 10-15 by m-cap could be risky.

When the weight of cryptocurrencies exceeds the assigned allocation in your portfolio, book profits. Booking regular profits is essential in such a volatile asset class. When they fall below your allocation, invest more. Investing in a staggered manner will help you benefit from their volatility. Sticking to the larger, more established cryptocurrencies will give you the courage to keep investing during bearish phases.

In many parts of the world you can use bitcoin as a currency. You can buy things with it, even a cup of coffee. In India, the transaction fee for using cryptocurrencies to buy and sell goods and services tends to be high.