Chapter 3
Recognizing the Risks of Cryptocurrencies
IN THIS CHAPTER
Understanding the concept of return in crypto investing
Getting to know cryptos’ risks
Seeing an example of cryptocurrency return versus risk
Exploring different types of cryptocurrency risks
Applying your risk tolerance to your investment strategy
So you’re excited to jump on the crypto wagon, perhaps because you expect a gigantic return (profit) on your investment. That’s basically the reward for investing. However, you can’t consider return without also looking at risk. Risk is the uncertainty surrounding the actual return you generate. What may represent high risk for others may not be as risky for you due to everyone’s unique lifestyles and financial circumstances.
Cryptocurrencies have shown their fair share of volatility, which has made some investors millions of dollars while wiping out some others’ initial investment. This chapter looks at cryptocurrencies’ price volatility, defines cryptocurrency rewards and risk, describes different types of risk, and gives you pointers on managing risk.
Reviewing Cryptocurrency Returns
Different assets generate different types of returns. For example, one source of return is the change in the investment’s value. Also, when you invest in the stock market or the forex (foreign exchange) market, you may generate an income in the form of dividends or interest. Investors call these two sources of return capital gains (or capital losses) and current income, respectively.
Although most people invest in the cryptocurrency market for capital gains, some cryptocurrencies actually offer current income opportunities. You get an introduction to cryptocurrency returns in Chapter 2 of Book 6.
Capital gains (or losses)
The most popular reason for crypto investing is to see gains in the coins’ value. Some people associate the coins with precious metals such as gold. Doing so makes sense because, just like gold, a limited amount is available for most cryptocurrencies, and one way to extract many of them is to “mine.” (Of course, you don’t need to gear up with a pickax and headlamp when mining cryptocurrencies; head to Chapter 4 in Book 6 for an introduction to cryptocurrency mining.)
With that, many investors consider cryptocurrencies to be assets even though the Canada Revenue Agency (CRA) considers cryptos as commodities. People buy these currencies in hopes of selling them when the prices rise more. If the value of your cryptocurrency token goes higher from the time you purchase, you get capital gains when you sell the token. Congrats! If the prices go lower, you end up with capital losses.
Income
Income is a lesser-known type of return in the cryptocurrency market. Income is generated from something called crypto dividends.
Traditionally, dividends occur when public companies distribute a portion of their earnings to their shareholders. Traditional types of dividends include cash payments, shares of stock, or other property.
Earning dividends in the crypto market can get a bit more complicated. Different currencies have different operating systems and their own rules and regulations. However, the concept still remains the same. Crypto dividend payments are becoming increasingly popular among altcoins, which are the alternative cryptocurrencies besides Bitcoin. When choosing a cryptocurrency for your portfolio, you can consider looking into crypto dividends as well as the potential of capital gains (discussed in the preceding section).
Some of the most popular ways to earn crypto dividends are
- Staking: Holding a proof-of-stake coin in a special wallet (see Chapter 4 in Book 6)
- Holding: Buying and holding a crypto in any wallet
At the time of writing, some dividend-paying cryptocurrencies include NEO, KuCoin, BridgeCoin, Neblio, and Komodo. In addition, besides staking and holding, you can earn regular interest payments by participating in crypto lending. For example, you can earn up to 5 percent interest on your cryptos by allowing companies like Celsius Network to give out loans to the general public against cryptos.
Risk: Flipping the Other Side of the Coin
Investment returns are exciting, but you can’t consider return without also looking at risk. The sad truth about any type of investment is that the greater the expected return, the greater the risk. Because cryptocurrencies are considered riskier than some other assets, they may also provide higher returns. The relationship between risk and return is called the risk-return trade-off.
Cryptocurrency investing isn’t a get-rich-quick scheme. You shouldn’t invest in cryptocurrencies by using your life savings or taking out a loan. You must consider your risk tolerance, understand the different sources of cryptocurrency risks, and then develop an investment strategy that’s suitable for you — just you, not anyone else — because you’re unique, and so is your financial situation.
Also keep in mind that early Bitcoin investors waited years to see any returns. If you don’t have the patience required to see meaningful returns on your investment, you may need to forget about investing altogether.
That being said, a healthy amount of risk appetite is essential not only when investing but also in life. Don’t get so paranoid about risk that you just never leave the house for fear of getting into an accident!
Glimpsing Cryptocurrencies’ Reward versus Risk
One of the main reasons cryptocurrency investing became such a hot topic in 2017 was the crazy surge in the value of major cryptocurrencies such as Bitcoin.
Although you may have heard of Bitcoin the most, it wasn’t even among the ten best-performing crypto assets of 2017. Bitcoin’s value grew by more than 1,000 percent, but other, lesser-known cryptocurrencies such as Ripple and NEM were among the biggest winners, with a whopping 36,018 percent and 29,842 percent growth, respectively.
Where did Bitcoin stand on the performance list? Fourteenth!
These returns made investors and noninvestors alike super excited about the cryptocurrency market. By the beginning of 2018, almost everyone you knew — your doctor, your rideshare driver, perhaps even your grandmother — was probably talking about Bitcoin, whether or not the person had any experience in any sort of investing.
However, as is true of any type of investment, what goes up must come down, including the cryptocurrency market. Because the cryptocurrency prices had gone up so much, so quickly, the crash was as hard and as speedy. For example, by February 2018, Bitcoin had dropped to the three-month lows of $6,000 from highs of nearly $20,000 (in U.S. dollars).
The cryptocurrency then started to consolidate above the $6,000 support level, forming lowering highs as you can see in Figure 3-1. In this context, support level is a price that the market has had difficulty going lower than in the past. In this case, the price had difficulty breaking below $6,000 back in November 2017. Lower highs are those mountain-like peaks on the chart. Every peak (high) is lower than the previous one, which indicated a decrease of popularity among market participants.
Many analysts considered the great appreciation of major cryptocurrencies’ value to be a bubble. This fluctuation is a heck of a roller-coaster ride in such a short period of time! The returns were great for those who invested early and took profit at the highs. But just imagine investing in the market when the prices were up and watching the value of your investment going lower and lower. That’s one of the major risk factors in any type of investing.
Source: tradingview.com
FIGURE 3-1: Bitcoin’s price action versus the U.S. dollar from 2017 to 2018.
Digging into Different Kinds of Risk
Getting educated about risk puts you right on top of your game. Knowing your risk tolerance, you can create a strategy that protects you and your wealth. The risks associated with cryptocurrencies come from many different sources. Here are the various types of crypto risks.
Crypto hype risk
Though getting hyped up in the thought of buying your dream car is a good thing, the hype surrounding cryptocurrencies isn’t always as exciting. The main reason cryptos have a lot of hype is that most people don’t know about what they’re investing in; they just end up listening to the crowd. The crypto hype back in 2017 was one the many drivers of the fast-and-furious market surge. After people started to figure out what they’d invested in, the prices crashed. This type of behaviour became so popular that crypto geeks created their very own lingo around it. Here are a few terms:
- FOMO: This crypto-geek term stands for “Fear of missing out.” This happens when you see a massive surge in a crypto you don’t own and you hurry in to get your hands on it as the price goes up. Hint: Don’t do it! What goes up must come down, so you may be better off waiting for the hype to calm down and buy at lower prices.
- FUD: This is short for “Fear, uncertainty, and doubt.” You can use this in a Reddit post when you hear one of those Doctor Doomsdays talking down the market. JPMorgan Chase’s CEO, Jamie Dimon, spread one of the biggest FUDs in September 2017 by calling Bitcoin a fraud. In January 2018, he said he regretted saying that.
- ATH: Short for “All-time high.” Whenever the price of an asset reaches the highest point in its history, you can say, “It’s reached an ATH.”
- Bag holder: You don’t want this to be your nickname! Bag holders are those investors who bought out of FOMO at an ATH and missed the chance of selling. Therefore, they are left with a bag (wallet) filled with worthless coins.
- BTFD: This one stands for “Buy the f@#&ing dip!” In order for you not to become a bag holder, you’ve got to BTFD.
Before falling for the market noise, arm yourself with knowledge on the specific cryptos you’re considering. You have plenty of opportunities to make lots of money in the crypto market. Be patient and acquire the right knowledge instead of betting on the current hype. An investor who trades on the hype probably doesn’t even have an investment strategy — unless you call gambling a strategy!
Security risk
Scams. Hacking. Theft. These issues have been a common theme in the cryptocurrency market since Bitcoin’s inception in 2009. And with each scandal, the cryptocurrencies’ values are compromised as well, although temporarily. Your cryptocurrency can be compromised in three main ways, which are outlined in the following sections. You should definitely follow safety precautions in every step of your cryptocurrency investing strategy.
Safety check #1: The cryptocurrency itself
Hundreds of cryptocurrencies are already available for investments, with thousands of new ICOs (initial coin offerings) on the way. When choosing the cryptocurrency to invest in, you must educate yourself on the blockchain’s protocol and make sure no bugs (or rumours of bugs) may compromise your investment. The protocol is the common set of rules that the blockchain network has agreed upon. You may be able to find out about the nature of the cryptocurrency’s protocol on its white paper on its website. The white paper is an official document that the crypto founders put together before their ICO, laying out everything there is to know about the cryptocurrency. But companies are unlikely to share their shortcomings in their white papers. That’s why reading reviews on savvy websites like Reddit and InvestDiva.com can often be your best bet.
These types of bugs appear even in the major cryptocurrencies. For example, a lot of negative press surrounded EOS’s release of the first version of its open source software before June 2, 2018. A Chinese security firm had found a bug in the EOS code that could theoretically have been used to create tokens out of thin air. However, EOS was able to fix the bugs. To further turn the bad press into positive, Block.one, the developer of EOS, invited people to hunt for undiscovered bugs in return for monetary rewards (a process known as a bug bounty).
Reliable cryptocurrency issuers should take matters into their own hands immediately when a bug is found. But until they do, you’re wise to keep your hands off their coins!
Safety check #2: The exchange
Exchanges are where you trade the cryptocurrency tokens. You need to make sure that your trading host is trustworthy and credible. Countless numbers of security incidents and data breaches have occurred in the crypto community because of the exchanges.
One of the famous initial hacks was that of Japan-based Mt. Gox, the largest Bitcoin exchange, in 2013. At the time, Mt. Gox was handling 70 percent of the world’s Bitcoin exchanges. However, it had many issues, such as lack of a testing policy, lack of a version control software, and lack of a proper management. As all these problems piled up, in February 2014 the exchange became the victim of a massive hack, where about 850,000 Bitcoins were lost. Although 200,000 Bitcoins were eventually recovered, the remaining 650,000 have never been recovered.
Many exchanges have learned a lesson from this incident and are keeping up with the latest safety measures. However, exchange hacks still happen almost on a monthly basis.
In centralized exchanges, which are like traditional stock exchanges, the buyers and sellers come together, and the exchange plays the role of a middleman. These exchanges typically charge a commission to facilitate the transactions made between the buyers and the sellers. In the cryptoworld, centralize means “to trust somebody else to handle your money.” One of the main issues with centralized cryptocurrency exchanges is their vulnerability to hacks. In some past hacking scandals, however, the exchange has paid the customers back out-of-pocket. That’s why choosing a centralized exchange wisely, knowing it has the financial ability to combat hackers and pay you in case it gets hacked, is important. Of course, with the popularity of cryptocurrencies, more centralized cryptocurrency exchanges are bound to pop up in the market. Some will succeed, and some may fail. Therefore, you need to pick your crypto shop wisely.
As time goes by, the market learns from previous mistakes and works on a better and safer future. However, you still need to take matters into your own hands as much as possible. Before choosing an exchange, take a look at its security section on its website. Check on whether it participates in any bug bounty programs to encourage safety. And, of course, ask the right people about the exchange. In Invest Diva’s Premium Investing Group, we keep an eye on the latest developments in the market and keep our members informed about any shady activities. So feel free to stop by https://learn.investdiva.com/join-group!
Safety check #3: Your wallet
The final round of security check is all in your own hands because what kind of crypto wallet you use is entirely up to you. Though you don’t physically carry your crypto coins, you can store them in a secure physical wallet. You actually store the public and private keys, which you can use for making transactions with your altcoins, in these wallets as well. You can take your wallet’s security to a higher level by using a backup.
Volatility risk
Volatility risk is essentially the risk in unexpected market movements. Though volatility can be a good thing, it can also catch you off guard sometimes. Just like any other market, the cryptocurrency market can suddenly move in the opposite direction from what you expected. If you aren’t prepared for the market volatility, you can lose the money you invested in the market.
The volatility in the cryptocurrency market has resulted from many factors. For one, it’s a brand-new technology. The inception of revolutionary technologies — such as the Internet — can create initial periods of volatility. The blockchain technology and its underpinning cryptocurrencies take a lot of getting used to before they become mainstream.
The best way to combat the cryptocurrency volatility risk is looking at the big picture. Volatility matters a lot if you have a short-term investing horizon because it’s an indicator of how much money you may make or lose over a short period. But if you have a long-term horizon, volatility can turn into an opportunity.
You can also offset volatility risk by using automated trading algorithms on various exchanges. For example, you can set up an order like “sell 65 percent of coin 1,” “100 percent of coin 2,” and so on if the price drops by 3 percent. (This is essentially a stop-loss order but for the case of cryptos where one can trade fractional amounts.) This strategy can minimize the risk of volatility and allow you to sleep well at night.
Liquidity risk
By definition, liquidity risk is the risk of not being able to sell (or liquidate) an investment quickly at a reasonable price. Liquidity is important for any tradable asset. The forex market is considered the most liquid market in the world. But even in the forex market, the lack of liquidity may be a problem. If you trade currencies with very low volume, you may not even be able to close your trade because the prices just won’t move!
Cryptocurrencies can also see episodes of illiquidity. Heck, the liquidity problem was one of the factors that led to the high volatility in Bitcoin and other altcoins described earlier in this chapter. When the liquidity is low, the risk of price manipulation also comes into play. One big player can easily move the market to his or her favour by placing a massive order.
The crypto community refers to these types of big players as whales. In the cryptocurrency market, whales often move small altcoins by using their huge capital.
On the bright side, as cryptocurrency investing becomes more available and acceptable, the market may become more liquid. The increase in the number of trusted crypto exchanges will provide opportunity for more people to trade. Crypto ATMs and payment cards are popping up, helping raise the awareness and acceptance of cryptocurrencies in everyday transactions.
Another key factor in cryptocurrency liquidity is the stance of countries on cryptocurrency regulations. If the authorities are able to define issues such as consumer protection and crypto taxes, more people will be comfortable using and trading cryptocurrencies, which will affect their liquidity.
When choosing a cryptocurrency to trade, you must consider its liquidity by analyzing its acceptance, popularity, and the number of exchanges it’s been traded on. Lesser-known cryptocurrencies may have a lot of upside potential, but they may put you in trouble because of lack of liquidity.
Vanishing risk
Hundreds of different cryptocurrencies are currently out there. More and more cryptocurrencies are being introduced every day. In ten years’ time, many of these altcoins may vanish while others flourish.
A familiar example of vanishing risk is the dot-com bubble. In the late 1990s, many people around the world dreamed up businesses that capitalized on the popularity of the Internet. Some, such as Amazon and eBay, succeeded in conquering the world. Many more crashed and burned. Following the path of history, many of the booming cryptocurrencies popping up left and right are destined to bust.
To minimize the vanishing risk, you need to analyze the fundamentals of the cryptocurrencies you choose to invest in. Do their goals make sense to you? Are they solving a problem that will continue in the years to come? Who are their partners? You can’t vanish the vanishing risk entirely (pun intended), but you can eliminate your exposure to a sudden bust.
Regulation risk
One of the initial attractions of cryptocurrencies was their lack of regulation. In the good old days in cryptoland, crypto enthusiasts didn’t have to worry about governments chasing them down. All they had was a white paper and a promise. However, as the demand for cryptocurrencies grows, global regulators are scratching their heads on how to keep up — and to not lose their shirts to the new economic reality.
To date, most digital currencies aren’t backed by any central government, meaning each country has different standards.
You can divide the cryptocurrency regulation risk into two components: the regulation event risk and regulation’s nature itself.
- The regulation event risk doesn’t necessarily mean that the cryptocurrency market is doing poorly. It just means the market participants reacted to an unexpected announcement. In recent years, every seemingly small regulation announcement drove the price of many major cryptocurrencies and created a ton of volatility.
-
At the time of writing, there are no global cryptocurrency regulators, so existing regulations are all over the board. In some countries, cryptocurrency exchanges are legal as long as they’re registered with the financial authorities. Other countries have been stricter on the cryptocurrencies but more lenient on the blockchain industry itself.
To stay updated on Canada’s cryptocurrency rules, visit www.canada.ca/en/financial-consumer-agency/services/payment/digital-currency.html.
The future of cryptocurrency regulations seems to be bright at this writing, but it may impact the markets in the future. As the market grows stronger, though, these impacts may turn into isolated events.
Tax risk
When cryptocurrency investing first got popular, hardly anyone was paying taxes on the gains. A lot of underreporting was going on. However, as the market gets more regulated, the authorities may become stricter on taxation.
Different countries have different rules. In the United States, for example, tax risk involves the chance that the authorities may make unfavourable changes in tax laws, such as limitation of deductions, increase in tax rates, and elimination of tax exemptions. In other countries, tax risk can get more complicated. For example, at the time of writing, the Philippines hasn’t clearly established whether the Bureau of Internal Revenue will treat cryptocurrencies as equities, property, or capital gains tax.
According to the Canadian government, “Tax rules apply to digital currency transactions, including those made with cryptocurrencies. Using digital currency does not exempt consumers from Canadian tax obligations. This means digital currencies are subject to the Income Tax Act.” Stay informed by visiting canada.ca/en/financial-consumer-agency/services/payment/digital-currency.html. The tax treatment of cryptocurrencies is covered at canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html.
Although virtually all investments are vulnerable to increases in tax rates, cryptocurrency taxation is a fuzzy area. Most regulators can’t even agree on the basic concept of what a token represents!
Exploring Risk Management Methods
The only way you can achieve your investment goals is to invest at a risk level consistent with your risk tolerance assessment. You can measure your risk tolerance by considering objective measures like your investment goals, your time horizon for each goal, your need for liquidity, and so on. You can increase your risk tolerance by setting longer-term goals, adding to your savings by using methods other than online investing, and lowering your need for current liquidity.
These things are certainly easier said than done, especially considering you never know when you’re gonna get hit financially. The following sections provide guidance on how to manage risk by building an emergency fund, being patient with your investments, and diversifying.
Check out this master class on my website where I (coauthor Kiana) explain how you can calculate your personal risk tolerance and give you all the analysis tools and questionnaires in order to make your money work for you: https://learn.investdiva.com/free-webinar-3-secrets-to-making-your-money-work-for-you. See the nearby sidebar “Measuring your own risk tolerance” for more information, too.
Build your emergency fund first
My husband and I were recently exposed to an unpredicted financial burden. After a year of financial success for both of us, we went ahead and upgraded our budget, bought a new house in an awesome neighbourhood, and added some luxury expenses we normally wouldn’t go after. It was good times!
Then the unexpected tax law change in the United States put us in a higher tax bracket than usual and took away some of our previously sought tax exemptions and deductions. Right after that, our daughter, Jasmine, was born, and our plans to have our parents take care of her for the first six months fell through because of sudden health issues on both sides of the family. As the saying goes, when it rains, it pours — figuratively and literally. Our area got hit by a few storms, which flooded our basement, damaged our trees, and dropped a few branches on our house. We now needed an additional budget for the damages.
I tell this story simply to point out the importance of having an emergency fund, no matter what you’re investing in or what your strategy is. Thanks to our emergency fund, we were able to overcome this financially challenging time and turn our focus back on raising our little bundle of joy. Of course, now we had to rebuild the fund from scratch.
You can calculate your emergency fund by dividing the value of your total immediately accessible cash by your necessary monthly expenses. That will give you the number of months you can survive with no additional cash flow. The result must be greater than six months. But the more the merrier. For more on risk tolerance calculation, visit https://learn.investdiva.com/free-webinar-3-secrets-to-making-your-money-work-for-you. Also, check out Chapter 3 in Book 1 for more on establishing an emergency reserve.
You must have an emergency fund before creating an investment portfolio, let alone adding cryptocurrencies to it.
Be patient
The risks involved with cryptocurrencies are slightly different from those of other, more established markets such as equities and precious metals. However, you can use similar methods for managing your portfolio risk regardless of your investments.
The most common reason many traders lose money online is the fantasy of getting rich quick. I can say with confidence (verifiably) that the vast majority of my long-term students made money, and in many cases a lot of money. The key has been patience.
“Patience is a profitable virtue” is the mantra of our investment group. The majority of our portfolio holding had been equities and forex, but the same has been true to Bitcoin holders. It took years (nine years, to be exact) for early Bitcoin enthusiasts to make any return on their holdings. And although a bit of a bubble occurred in 2017, nothing is stopping the markets from reaching and surpassing the all-time-high levels in the coming years.
The patience mantra doesn’t help only long-term investors. It also goes for traders and speculators. Very often, that investment or speculative position you took may go down or sideways for what seems like forever. Sooner or later, the market will take note of the sentiment and either erase losses or create new buy opportunities.
In Figure 3-2, you can see the role patience can play in an investor’s returns. Of course, you’d love for the markets to just march up to your profit target (that is, exit) price level straightaway. But more often than not, it just doesn’t work that way.
- The chart on the left shows a fantasy most traders have when they buy an asset. They hope the price will march up toward their profit target within their trading time frame, whether short-term or long-term, and make them money.
- The chart on the right shows the reality. Traders and investors alike often see a lot of dips in the price before the market reaches their profit target. Some investors panic on the dips and call it quits. But in the end, those who were patient and held their position through the rough times win. This can be true to both short-term and long-term investors, so the chart’s time frame doesn’t really matter.
Success follows a bumpy road. Your portfolio may even turn into negative territory at times. However, if you’ve done your due diligence of analyzing your investment, you must make time your friend in order to see long-term profit.
A great example of this idea is the crash of 2008. Almost all markets around the world dropped like a hot rock because of economic issues such as the mortgage crisis. Most people panicked and started to get out of their investments with massive losses. Had they given it some (well, a lot of) patience, they would’ve seen their portfolios in positive territory in around five years.
Source: InvestDiva.com
FIGURE 3-2: Demonstrating why patience is a profitable virtue.
Diversify outside and inside your cryptocurrency portfolio
As Chapter 2 in Book 6 notes, diversification is the “don’t put all your eggs in one basket” rule, and this age-old investing advice remains true to the revolutionary cryptocurrency market. Besides diversifying your portfolio by adding different assets such as stocks, bonds, or exchange-traded funds (ETFs), diversification within your cryptocurrency portfolio is also important.
For example, Bitcoin is perhaps the celebrity of all cryptocurrencies, so everyone wants to get hold of it. But Bitcoin is also the oldest cryptocurrency, so it has some unresolvable problems. Every day, younger and better-performing cryptocurrencies make their way into the market and offer exciting opportunities.
Besides age, you can group cryptocurrencies in several different ways for diversification purposes. Here are some examples:
- Major cryptocurrencies by market cap: This category includes the ones in the top ten. At the time of writing, these options include Bitcoin, Ethereum, Ripple, and Litecoin.
- Transactional cryptocurrencies: This group is the original category for cryptocurrencies. Transactional cryptocurrencies are designed to be used as money and exchanged for goods and services. Bitcoin and Litecoin are examples of well-known cryptos on this list.
- Platform cryptocurrencies: These cryptocurrencies are designed to get rid of middlemen, create markets, and even launch other cryptocurrencies. Ethereum is one of the biggest cryptos in this category. It provides a backbone for future applications. NEO is another prime example. Such cryptocurrencies are generally considered good long-term investments because they rise in value as more applications are created on their blockchain.
- Privacy cryptocurrencies: These options are similar to transactional cryptocurrencies, but they’re heavily focused toward transaction security and anonymity. Examples include Monero, Zcash, and Dash.
- Application-specific cryptocurrencies: One of the trendiest types of cryptos, application-specific cryptocurrencies serve specific functions and solve some of the world’s biggest problems. Some examples of such cryptos are VeChain (used for supply chain applications), IOTA (Internet of Things applications), and Cardano (cryptocurrency scalability, privacy optimizations, and so on). Some get super specific, such as Mobius, also known as Stripe for the blockchain industry, which was seeking to resolve the payment issues in the agriculture industry in 2018. Depending on the specifics of each project, a number of these cryptos may prove highly successful. You can pick the ones that are solving issues closer to your heart; just be sure to analyze their usability, application performance, and project team properly.
One key problem the cryptocurrency market faces when it comes to diversification is that the whole market appears to be extremely correlated. The majority of cryptocurrencies go up when the market sentiment turns bullish (upward), and vice versa. Despite this tendency, you can diversify away risk in a crypto-only portfolio by adding more crypto assets to your portfolio. By investing in multiple crypto assets, you can spread out the amount of risk you’re exposed to instead of having all the volatility of the portfolio come from one or a few assets.