Many investors believe that spreading money across many assets is the best way to reduce risk. This idea comes from traditional finance, where diversification protects against losses. In cryptocurrency, however, too much diversification can limit growth. If you hold twenty to thirty small positions, your portfolio may stay flat even when the market rises. This is why I want to use this article to explain why overdiversification hurts returns and suggests a better approach: focus on three to five strong investments and one main large cap coin.
The Common Belief In Diversification
Diversification means putting money into different assets so that if one fails, others can make up for it. In stocks or bonds, this works well because markets move slowly and risks are spread out. You often hear advice like “do not put all your eggs in one basket.” This makes sense for beginners who want to avoid big losses.
In cryptocurrency, the story changes. Assets can rise or fall quickly. A single project can grow ten times in value within months, weeks, days, hours or minutes. If your money is split into many small parts, you miss out on these big gains. Instead of growing, your portfolio just follows the average market performance. This is why many holders see little progress despite holding dozens of tokens.
How Holding Many Small Positions Reduces Returns
Imagine you have $1000 to invest. You split it into twenty $50 positions across different cryptocurrencies. One of them performs well and doubles in value. Your $50 gain from that position adds only five percent to your total portfolio. The other positions may stay the same or lose a little, pulling down the overall result.
Now compare this to putting $500 into one strong asset that doubles. You gain +$500, which is a 50% increase for half your portfolio. The difference comes from concentration. Small positions dilute the impact of winners. They also create other problems.
First, tracking many assets takes time. You need to follow news, updates, and market changes for each one. This spreads your attention thin and leads to missed opportunities.
Second, fees add up. Buying and selling small amounts often costs more in transaction fees relative to the position size.
Third, emotional stress increases. With many holdings, you worry about each one, leading to poor decisions like selling too early.
In volatile markets like cryptocurrency, concentrated portfolios often outperform diversified ones. For example, during the 2021 bull run, holders who focused on a few top projects saw much higher returns than those with broad exposure. Over diversification turns your portfolio into an index fund without the benefits of low costs or stability.
The Benefits Of Focusing On 3 To 5 Strong Investments/Narratives
To grow your portfolio, shift to three to five investments where you have strong belief. These are called conviction plays. Choose them based on deep research. Look at the project’s technology, team, community, and market fit. Ask yourself: does this solve a real problem? Is there growing adoption?
With fewer holdings, each one gets more of your capital. If one succeeds, it lifts the entire portfolio. This approach requires discipline. You must avoid chasing trends and stick to what you understand. Start by reviewing your current holdings. Sell the weak ones and add to the strong.
For instance, if you believe in decentralized finance, pick two or three leading protocols. Allocate most of your funds there. Monitor them closely and adjust as needed. This method reduces noise and lets you capitalize on big moves. Many successful investors in cryptocurrency follow this path. They build wealth by betting big on what they know.
Leading With One Main Coin
Take it further by choosing one narrative leader. This is the core idea or asset that guides your portfolio. It could be a major trend like artificial intelligence in blockchain or real world assets. Pick one leading project in that space and make it your largest holding.
You know why this works? Narratives drive market cycles in cryptocurrency. When a story gains traction, related assets rise together. By focusing on a leader, you capture the upside early. For example, if web3 gaming becomes popular, invest in the top game or platform. Support it with a few related plays, but keep the leader central.
This setup creates asymmetry. The potential reward outweighs the risk because leaders often multiply in value during hype. If the narrative fades, you can pivot without losing everything. Always base this on facts, not hype. Read whitepapers, follow developer activity, and watch user growth.
Steps To Restructure Your Portfolio
First, list all your holdings and rank them by confidence.
Keep the top three to five. Sell the rest and reinvest.
Identify your main narrative.
Research it thoroughly.
Set rules for when to buy or sell. This prevents emotional trades.
Remember, this is not financial advice. Every investor’s situation differs. Consult professionals if needed. The goal is to move from passive holding to active growth.
What do you think? Is your portfolio too diversified? Share your thoughts below. Let’s discuss how focus can change results.