Definition
Diversification distributes a portfolio among assets whose risks are not identical. The objective is to limit the effect of one holding’s failure or underperformance on the whole portfolio. It differs from simply increasing the number of token names: many tokens can share the same market, issuer, infrastructure, or collateral exposure.
How It Works
The benefit depends on position weights and how returns move together. If one small holding falls while other holdings remain stable, the portfolio impact is smaller than if all funds were concentrated in it. Diversification can operate across asset classes, sectors, strategies, or counterparties, but each dimension addresses different risks.
For example, holding tokens from several protocols may diversify project exposure while leaving all funds dependent on one custodian. Conversely, using multiple custodians does not diversify the market risk of owning the same asset everywhere.
Key Considerations
Diversification cannot prevent broad market losses or guarantee profit. Correlations may rise during stress, and added holdings can introduce liquidity, monitoring, and transaction costs. A portfolio’s apparent variety should be assessed against underlying dependencies. Changes in prices also alter position weights over time, so an initially diversified allocation may become concentrated.