Jimmy Song, a bitcoin educator, entrepreneur and bitcoin core developer, published an article about the benefits (or shortcomings) of diversified cryptocurrency portfolios. He put forward a new argument explaining why it doesn't make sense to add a coin to a Bitcoin portfolio.
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Why not put all the eggs in one basket?
In the case of stock market, the reason for diversifying investment is to reduce volatility and optimize risk/reward ratio. Buy 10 stocks instead of 1 so you can hedge against any catastrophic loss of this stock. This stock is also subject to certain transparency requirements, and its movements are likely to be closely related to what is happening in the real world.
In contrast, for most cryptocurrencies, ideals and reality can be quite different. Reality exists in the code, which most investors cannot understand. The reality is that these cryptocurrencies may eventually be unusable, leaving only white papers or ideals. Encrypted currencies do not have the same mutual checks and balances to ensure these are interrelated. In fact, the development team may have an over-commitment and motivation to deliver the product.
As most people have seen, real value may be greatly exaggerated by ideals. Therefore, returns are often exaggerated and risks are underestimated. This will not reduce your exposure to volatility.
Why is Bitcoin different?
When Bitcoin came out, people didn't over-commit or beautify their ideals. Because there is no market at all. This concept exists on top of the code, or dies on the code, and the code was written by the way before the white paper was released, and was actually overdelivered.
In addition, Bitcoin code has been scrutinized by thousands of people who may know Bitcoin better than you and me. Bitcoin is truly decentralized and open source. So, Song's conclusion is that Bitcoin really should be part of your portfolio.
“Technical reality is usually understood by only a few people. Others believe that what the creators wrote in the Bitcoin white paper reflects reality. Nothing really makes the ideal match reality. On the contrary, information about Bitcoin comes from Making a small portion of Bitcoin."
He went on to discuss a number of competing currencies based on Bitcoin codes, such as Litecoin, as well as Bitcoin Cash and BSV. However, due to the lack of major positive differences compared to Bitcoin, and the maintenance of code bases for these competitors is often poor, they do not provide the expected benefits of reducing risk and volatility.
Song pointed out:
“Most of the coins have not been reviewed, only useful marketing stories (sometimes, not even!), and the result is a huge pyramid of reverse trust, and the founders are at the bottom of the pyramid.”
So what else should you invest in?
You have some bitcoin, what else do you need? According to Song, you should do your own research, because the ideal story is not credible, which means checking the code. You may not be able to do it (non-code farmers, closed projects or unavailable), or you are not willing to invest time.
Obviously, you can't believe that the views you read/hear on the Internet are fair. Therefore, Song believes that the only conclusion is that once you have Bitcoin in your portfolio, it makes no sense to diversify your investment in other currencies.
“Implementing “diversification” from bitcoin to other so-called cryptocurrencies is like saying that you should diversify from the US dollar to Bolivia and Zimbabwe in Venezuela. This is really a bad idea.”