The terms asset allocation and diversification are often used interchangeably. However, each of them refers to an almost different aspect of risk management.
Asset Allocation in Money Management Strategy explains how capital is distributed among different asset classes in a portfolio, but Diversification describes the allocation of capital to each of those asset classes.
The main goal of these strategies is to maximize the expected profit while reducing the potential risk to the lowest possible level. In general, these strategies should determine the investment horizon, risk tolerance and sometimes economic conditions from a broader perspective for the investor.
What makes these two strategies a powerful combination is that risk is not only distributed among different asset classes but also within each asset class. Some financial experts believe that determining the asset allocation strategy may be more important than selecting individual investments.
Although, in theory, diversification should also be done on crypto assets, it should be noted that this may not work in practice. This is because the cryptocurrency market is highly dependent on bitcoin price fluctuations.
How can a portfolio of unrelated assets be created when all the options in an asset class are strongly related? That is why it is said that diversification in cryptocurrencies is somewhat illogical.
However, it can be assumed that when this market matures, we can use a more systematic approach to diversification on the cryptocurrency portfolio. Undoubtedly, this market has a long way to go until then.
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