As the blockchain ecosystem develops and new cryptocurrencies spawn, investors are attempting to diversify their holdings to effectively capture the crypto market. After investors determine how much of their portfolios they want to dedicate to cryptocurrencies, a question soon follows: Which cryptocurrencies should constitute those holdings?
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Several avenues for diversifying cryptocurrency portfolios exist. Investors should weigh the costs and benefits of each of the following three methods for purchasing and holding crypto assets: assembling a diversified portfolio by buying cryptocurrencies individually through an exchange, purchasing a crypto trust or ETF, or enrolling in an automatically managed crypto robo-advisor.
1. Purchase a diversified crypto portfolio through an exchange
The most straightforward way to invest in an assortment of cryptocurrencies is to buy them through an exchange. Popular exchanges include Coinbase, Kraken, Gemini, Crypto.com, and Binance.
Pros
Crypto exchanges generally charge transaction fees, which are based on the costs the exchange pays to miners that process crypto transactions on the respective blockchains. These fees tend to be relatively low compared to robo-advisor fees and ETF/trust expense ratios. For example, Coinbase charges up to 0.6% of the transaction’s value, and the precise amount varies based on market conditions, payment method, and order size. Additional fees are charged based on the payment method used to purchase the cryptocurrency. Traders can avoid payment method fees by funding their accounts with an ACH bank transfer or by using Coinbase Pro.
Most exchanges maintain insurance policies that provide protection against a certain amount of losses of customer funds due to criminal activities against the exchange like theft, hacking, and unauthorized employee access.
Cons
Since investors using exchanges must identify the cryptos they want to purchase and execute their own trades, they face a high research burden in deciding which cryptos to buy, how much to buy, and when to sell. Without the automated rebalancing provided by robo-advisors, exchanges require investors to react to market movements in real time, which can be pronounced when key events in a crypto’s lifecycle occur, such as when new partnerships are announced or a crypto becomes available to trade on a new exchange.
Read the full article here by Jasmin Sethi and Michael Farrington, Advisor Perspectives.
