In terms of investing, risk is defined as the chances of loss relative to an expected return. Hypothetically, if two assets are expected to return the same amount but one is a low-risk bond, and the other is a riskier real estate asset, the bond would be the preferred choice. However, in the real world, higher returns almost always correlate with a higher risk.
For example, savings accounts are virtually risk-free but offer nearly no interest anymore (after inflation is accounted for) with some European countries even implementing zero percent interest or negative interest.
Bonds and Certificates of Deposits (CDs) offer a higher interest rate, but the interest they offer is only slightly higher than market interest rates.
Real estate, stocks, and p2p lending are some higher return options but are considered risky. Bitcoin and cryptocurrency returns can make millionaires overnight, but 30 to 40 percent drops on large-cap cryptos are common when markets turn.
In worst case scenarios, investments in smaller crypto coins can diminish by 70 to 99 percent over short periods of time. The best way to secure returns while mitigating risk, therefore, is to diversify.
Combining cryptocurrency trading with traditional asset holding is an excellent way to achieve diversification. This is true because the best diversification is between two assets that are not correlated in any way. This means, for example, that buying stocks of two different tech companies offers very limited diversification. For example, a sudden increase in silicon prices could lead to both tech stocks tanking in price at the same time.
Diversifying between stocks and real estate assets also carries a certain degree of risk, as they all relate to the mainstream economy, and can be influenced by some of the same factors. On the other hand, cryptocurrencies have shown no direct correlation with mainstream economies, making it truly unique as an asset class. In other words, the performance of the US economy, Chinese economy, etc. has been shown to have no direct link to the returns one sees in the cryptocurrency market.
However, as important as it is to diversify among asset classes, diversifying within each asset class is also recommended as a risk-management factor.
For example, when investing in stocks, it could be wise to purchase a mix of stocks from large and small-cap companies, purchasing stocks across unrelated sectors, or investing using a derivative that mimics an index. Since many large-cap companies are international, seeking exposure in foreign markets isn’t necessary, however, it could be helpful.
The approach to investing in real estate or using p2p lending is similar. If you’re investing in REIT’s, diversify between personal and commercial properties for the best risk to return ratio. The same approach can be applied to lending, by mixing high-quality/low return loans with low-quality/high return ones.
However, this concept gets a little tricky when it comes to cryptocurrencies, as there are now more than 1,500 cryptos from which to choose. And, unlike stocks or real estate, there are hardly any index funds, ETFs, or mutual funds that are generally available to the public.
That’s where eToro comes into play. eToro is a social trading platform, which allows anyone to quickly create and maintain a diversified portfolio spanning various cryptocurrencies, stocks, and even leveraged positions.
eToro clients can also use copy trading to imitate top traders for potentially better results – an especially useful tool for cryptocurrency beginners. Traders can also earn a second income if other users copy their trading and they reach Popular Investor status.
The eToro social trading network is available both via a web platform and an app, and over 250 million trades have been opened on it since its inception. Users can create an account on their desktop, and stay informed while on the go, thanks to eToro’s mobile app for Apple and Android devices.
Cryptocurrencies can fluctuate widely in prices and are, therefore, not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework. Your capital is at risk. This is not investment advice.
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