Crypto Diversification: “Don’t put all your eggs in one basket.” For a long time, this was standard advice in investing and even in crypto. The idea was that spreading your money across many different coins would protect you if one coin crashed. This approach used to make sense, and many beginners were told to buy a bit of everything.
But in 2023–2024, the crypto market has changed a lot. Diversifying into a bunch of cryptocurrencies has often turned into an overrated – even unprofitable – strategy for many traders. In this article, we’ll break down why that is, using simple language and real examples from the past two years.
Why Diversification Was Once a Good Idea
In traditional investing, diversification means spreading your investments around so no single loss can wipe you out. The same logic was applied to crypto: since crypto is very risky and volatile, people thought holding many different coins would lower the chance of losing it all. The theory is simple: don’t put all your eggs in one basket – spread them out. If Bitcoin had a bad day, maybe another coin like XRP or Cardano would do better, balancing your losses. In the early days, this strategy had some merit. Crypto markets were new and chaotic; one coin might skyrocket while another tanked, so holding a mix could capture some big winners and buffer against losers.
By having a mix of big coins (like BTC or XRP) and smaller altcoins, investors hoped to catch the next big thing while also having some stability. And indeed, during past “altcoin seasons” (periods when smaller coins outperform Bitcoin), a diversified basket could see huge gains. For example, in the 2017 and 2021 bull runs, many tiny altcoins surged by hundreds or thousands of percent. If you had a bunch of different coins, chances were you owned at least one or two of those moonshots. Diversification was seen as a way to maximize returns and minimize risk at the same time – a win-win, in theory.
What Changed in 2023–2024?
The crypto landscape of 2023–2024 is not the same as 2017 or even 2021. Several key changes have made broad diversification less effective:
Almost All Coins Move Together
It turns out a lot of cryptocurrencies tend to rise and fall in sync with Bitcoin and overall market sentiment. In theory, diversification works when your assets behave differently (are uncorrelated). But in crypto, many coins are highly correlated, meaning they often all go up or down at the same time. When the market crashed in 2022, nearly every coin plunged simultaneously. And when the market recovered in 2023, the strongest coins (like BTC) led the way while many others just followed mildly. So holding 10 different cryptos didn’t protect you much – if Bitcoin fell, most of your coins likely fell, too.
Quality Over Quantity
The number of cryptocurrencies has exploded. There are tens of thousands of coins and tokens out there (one source even cited over 36 million tokens if you count every little project!).
The harsh truth is that most of these projects don’t have real value or usage. In 2023, investors became much more skeptical about new altcoins. Many tokens that were hyped as “the next big thing” turned out to have weak fundamentals or were outright scams/meme coins. Spreading money across a lot of random new coins became more like gambling than investing. As one crypto commentator put it bluntly, a lot of altcoins (especially meme coins) are “really just Ponzi schemes… It’s all about making money and not being one of the last to sell”.
In other words, many coins are designed to enrich early buyers and leave latecomers holding the bag. In 2023–2024, people saw this happen repeatedly: coins would shoot up and then crash to near zero. If you happened to diversify into those, you got burned.
Regulation and Investor Caution
2023 brought a wave of regulatory crackdowns, especially in the U.S., that changed the game for altcoins. In June 2023, for example, the U.S. SEC sued major exchanges and labeled numerous altcoins as unregistered securities. This scared a lot of investors away from those coins. There was a “flight to safety”: people pulled money out of smaller tokens and moved it into Bitcoin, Ethereum, or even stable coins.
Data from mid-2023 showed that Bitcoin, Ether, and stablecoins made up over 80% of the total crypto market value – the highest dominance since early 2021.
In other words, almost all the value in the crypto market was concentrated in the top two coins and cash-like assets, as investors fled the riskier small coins. When the SEC news hit, major altcoins like Binance Coin (BNB), Cardano (ADA), and Solana (SOL) dumped about 30% in a week.
So if you were diversified into those, your portfolio took a big hit all at once. Meanwhile, Bitcoin barely blinked during the same period. This trend continued into 2024: institutional interest (like ETF products) focused on Bitcoin, not the hundreds of altcoins. Bitcoin’s market dominance climbed, and at points in 2024 it stayed high while many altcoins struggled to recover.
No Big “Altseason” Recently
In previous cycles, after Bitcoin had a huge rally, there was often a period where altcoins outperformed (the famed “altseason”). A diversified portfolio would shine in those times. But in late 2023 and early 2024, that pattern didn’t really materialize. Bitcoin remained the star of the show, hitting new highs, while a lot of altcoins failed to keep up.
Even Ethereum, normally the second-in-command, underperformed Bitcoin during this period. This bucked the trend of past booms. The usual rotation of profits from Bitcoin into smaller coins was weaker than expected. So waiting for your diverse basket of altcoins to have their turn to explode may have left you disappointed in this cycle. One analysis in early 2024 noted that altcoin market dominance hit a four-year low, meaning the share of the market held by altcoins was the smallest it’s been since 2019. That’s a clear sign that a broad mix of altcoins was a drag on performance recently.
Concentration of Returns in a Few Big Coins
By the end of 2023, it became evident that the lion’s share of crypto market gains were coming from the top assets. Bitcoin was up significantly from its lows, and Ethereum had solid gains too. But many lesser-known coins were flat or still deeply down from their peaks. A report in mid-2023 highlighted that Bitcoin and Ether were up ~57% and ~45% respectively year-to-date, far outpacing most smaller tokens.
Pantera Capital noted a similar trend: in the current cycle, by late 2023, Bitcoin had roughly tripled from the bottom while the broad altcoin market was up less than double.
So if you just held one or two of the top coins, you likely did better than someone who split their money into 10 different cryptos. This is a big shift from earlier times when smaller coins might have delivered the biggest punches. In 2023–2024, the best offense was holding the quality names, not a bunch of long shots.
The Pitfalls of Over-Diversifying Your Crypto Portfolio
“Diversify, but not di-worsify,” the saying goes. Over-diversification (holding too many coins) can actually work against you. Here are some things that go wrong when people over-diversify in crypto:
Diluted Returns
If you spread your investment across 20 or 30 coins, each one makes up only a tiny slice of your portfolio. Even if one of them doubles in price, the impact on your overall portfolio is small. Meanwhile, if a few of those coins drop or go to zero, they can cancel out the gains from the winners. As a result, your portfolio’s performance can end up average at best. You essentially start mirroring the overall market, for better or worse.
One crypto analyst noted that by allocating small amounts to a wide array of cryptos, you risk “missing out on significant gains from a few high-performing assets. …the portfolio becomes cluttered with mediocre performers, ultimately hindering overall returns.”
In plain terms: your winners don’t make you much money because they’re too small, and your losers still hurt.
Too Many to Track
Crypto moves fast. New developments, hacks, regulatory changes, mainnet launches – there’s always news. If you own 15 different coins, keeping up with all of them is a nightmare. Over-diversifying means you likely can’t stay on top of each project’s updates or warning signs. Important news (like a security exploit or an exchange delisting a coin) might slip past you until it’s too late. Managing a long list of assets becomes unnecessarily complex and stressful, especially for a beginner. It’s easy to lose track of why you even bought some of those coins. This can lead to poor decisions, like holding a dying project because you forgot to check on it, or selling a good project at the wrong time because you’re overwhelmed.
Higher Costs and Hassle
Each extra coin can mean extra transactions – buying, selling, swapping, rebalancing. Trading fees can add up, and moving funds around to chase the next hot token can eat into your returns. Over-diversifying often goes hand-in-hand with over-trading. Also, if you’re using specialized wallets or platforms for certain tokens, juggling all of that is a hassle and increases the chances of making a mistake (sending coins to the wrong address, etc.). While this isn’t usually the biggest problem, it’s a factor to consider – a simpler portfolio is just easier (and safer) to manage.
False Sense of Security
Perhaps the worst pitfall is thinking you’re safe just because you own a lot of different coins. In crypto, systemic risks can hit the entire market. If there’s a major macro downturn or another exchange collapse, almost every coin’s price will likely suffer. In 2022’s bear market, having 30 coins didn’t save you – you probably just had 30 coins all going down together. As mentioned, many cryptos are closely correlated, especially during crises. So an over-diversified crypto portfolio might feel safe (“I own a bit of everything, so I’m hedged!”), but in reality it can be like having all your eggs in one big, shaky crypto basket. You haven’t escaped crypto-specific risk; you’ve just spread it around within the same highly volatile asset class.
Including Bad Apples
The more coins you hold, the higher the chance that some of them are lemons. The crypto space is full of projects that sound good but don’t deliver – or worse, turn out to be scams. When you own dozens of coins, it’s almost certain that a few will implode spectacularly (think of the Terra/LUNA collapse in 2022, or various rug-pull tokens). If you only invested small amounts in each, you might not lose a lot on any single failure, but the accumulation of mini-losses adds up. Plus, the ones that go to zero obviously don’t come back, whereas your winners might only go up so much. Over-diversification makes it more likely you’ll be exposed to a blow-up like that. It’s better to thoroughly research and choose a handful of solid projects than to roll the dice on every new coin that crosses your path.
Real-World Examples of Over-Diversification Gone Wrong
Let’s illustrate how a over-diversified approach could underperform, using recent real-world context:
2022 Crypto Crash
In the massive sell-off of 2022, virtually the entire crypto market sank. A portfolio of 20 different cryptocurrencies likely saw most of them drop 70%–90% from their highs. For instance, popular coins like Solana, Cardano, and many DeFi tokens all plunged along with Bitcoin. The losses were so widespread that an investor with a “fully diversified” crypto portfolio would have still faced extremely heavy losses across the board. There was nowhere to hide except maybe stablecoins (and even some of those depegged briefly). This showed that diversifying within crypto didn’t offer the protection one might hope for in a market-wide downturn.
Mid-2023 Regulatory Panic
As mentioned earlier, when the SEC went after altcoins in June 2023, a broad basket of altcoins got hit hard simultaneously. If you held a mix of the top 10 or 20 altcoins, you would have seen a sudden drop in many of them at once. BNB, ADA, SOL, Polygon (MATIC) and others fell sharply.
A diversified altcoin portfolio during that week could easily be down 20% or more overall. Meanwhile, a portfolio focusing mainly on Bitcoin (and maybe Ethereum although it has been performing like trash recently) would have fared much better, since Bitcoin actually rose in dominance as money flowed out of those alts. In hindsight, diversifying into those coins just meant you had more assets exposed to the same regulatory risk.
Bitcoin vs. “Crypto Index” Performance
Suppose at the start of 2023, Alice and Bob each invested $1,000 in crypto. Alice split hers equally into 10 different coins (a mix of big names and a few smaller ones). Bob, on the other hand, put his whole $1,000 into just Bitcoin and Ethereum (say 70% BTC, 30% ETH). Fast forward to early 2024: How did they do? Bob’s focused portfolio likely significantly outperformed Alice’s diversified one. Why? Because Bitcoin roughly doubled in 2023, and Ethereum was up too, giving Bob about a ~60–70% gain overall (for example, BTC and ETH were up ~57% and 45% by mid-2023, and even more by year-end).
Alice’s portfolio, however, had some winners and some losers. Maybe a couple of her altcoins did great (let’s say one coin +120%, another +50%), but others lagged or lost value (several altcoins were flat or negative over 2023). The result might be that Alice’s total portfolio was only up modestly, say ~20–30%, or possibly even flat if she picked a few real duds. Her gains from the good picks were diluted by the poor performance of others. We actually saw this in broader market stats: by late 2023, Bitcoin’s dominance was growing and many smaller alts had yet to recover. If 75% of top coins don’t beat Bitcoin’s growth over a period, it’s considered “Bitcoin season” – and 2023 was very much a Bitcoin season in that sense.
Altcoin Index Funds Lagging
Some crypto products create an “index” of many coins so you don’t have to pick. In theory, that’s diversification on a platter. But these indexed funds often ended up underperforming a simple Bitcoin hold. For example, the Bitwise 10 Crypto Index (which holds 10 top coins) or similar baskets didn’t shoot out the lights in 2023. Because they held coins like XRP, Cardano, and others that underperformed, the index as a whole rose less than Bitcoin did.
This is similar to stock indexes: if the bulk of gains are coming from a few big tech stocks, an index heavy on other sectors won’t do as well. In crypto 2023, the “Big Two” (BTC and ETH) were the main drivers, so a diversified index was lagging. This real outcome shows that just owning more coins isn’t always better – sometimes it’s actually worse for your returns.
The bottom line from these examples: Over-diversification in crypto often meant you gained less and still could have lost big. Holding a bunch of coins didn’t shield you when the whole market fell, and when the market rose, your bundle likely grew slower than a simple, focused portfolio of top assets.
So, What Should Beginners Do Instead?
If diversifying into a dozen or more cryptos isn’t the golden ticket, what’s the smarter approach for a newcomer? Here are some friendly suggestions:
Focus on a Few High-Quality Coins
Instead of scattering your money across 20 different tokens, do a bit of homework and pick a few coins that you really believe in. Typically, many experts recommend sticking to the well-established cryptocurrencies – for example, Bitcoin and Ethereum (it might be better if you replace ETH with SOL or XRP) are the most obvious, since they have the longest track records and most adoption. You might also choose another project or two that you have researched and think has real potential (for instance, a top-tier altcoin that you understand well). By keeping your portfolio small and focused, you can actually learn about those projects, follow their news, and understand what drives their value. Your fortunes aren’t tied to the entire chaotic crypto universe, just the assets you think are strongest. Plus, when those few coins go up, you’ll actually feel it in your portfolio. Remember, diversification is important – but only to a point.
Don’t dilute your winners. A rule of thumb could be holding maybe 3–5 different coins at most as a beginner. That’s enough to not bet everything on one single coin, but not so many that you’re essentially buying the whole market.
Keep Some Cash or Stablecoins Handy
Another form of “diversification” that does make sense is not being 100% invested in volatile coins all the time. Holding some stablecoins (or cash) as part of your portfolio can reduce your risk and give you ammunition to buy dips or new opportunities. This isn’t about holding dozens of cryptos, but rather having a safe portion. In 2023, for example, those who kept some funds in stablecoins could stay calm during drops and even buy more Bitcoin or Ether at lower prices. If you had everything in volatile coins, your entire portfolio would swing wildly with the market. So consider allocating a percentage (depending on your risk comfort – maybe 10%, 20% or more) to something stable. It’s easier to manage risk when you’re not all-in on volatility.
Think Long Term & Don’t Chase every Hype
A lot of over-diversification happens when people chase every new coin that’s trending on Twitter or Reddit. As a beginner, it’s easy to get FOMO (fear of missing out) and throw a few bucks at every shiny object. Try to resist that urge. It’s better to have a solid plan with a few assets than a hodgepodge of coins you bought on impulses. Ask yourself for each investment: “Do I see myself holding this coin a year from now? Do I understand what could make it go up or down?” If the answer is no, maybe skip it. Timing matters too – if you buy a coin at the peak of its hype, diversification won’t save you from a loss. Instead of trying to time dozens of coins (which is impossible), focus on slowly building positions in a couple of strong coins, ideally when the price is reasonable. You might use strategies like dollar-cost averaging (investing a fixed amount regularly) into Bitcoin or Solana. This way, you’re less worried about short-term timing and more about the long-term growth of solid assets.
Diversify Across Asset Types, Not Just Crypto Tokens
If you truly want diversification, consider that crypto itself is one single asset class. A more balanced approach for beginners could be: put some money in crypto (say in 2–3 coins as discussed) and some money in other investments (stocks, bonds, etc., or even just a savings account). That way, you’re not putting all your eggs into the crypto basket. Within crypto, you can diversify a bit (don’t hold only one coin), but you don’t need to own every coin. This mindset will protect you better. For example, if crypto has a bad year, maybe your other investments or cash savings can buffer that. It’s about managing risk in your overall financial picture.
Set Limits and Monitor
If you do decide to hold a handful of coins, set some rules for yourself. For instance, you might decide no single coin will be more than 50% of your crypto portfolio, and you won’t hold more than 5 coins in total. Rebalance if one coin grows too large or if you feel one is no longer a good bet. And keep an eye on your coins – read updates, follow credible news sources or analysts for those projects. Treat it like tending a small garden: a few plants you water and weed, not a whole jungle you can’t control.
Learn from Data, Not Just Hype
The years 2023–2024 taught us through data that simply diversifying a lot was not a foolproof strategy. Use those lessons. For instance, you can look at charts of how an “all-in-Bitcoin” approach did versus an “all-in-altcoins” approach. The focused Bitcoin strategy dramatically outperformed in that period. While the future can always be different, it’s wise to heed the trend that quality beat quantity recently. Make decisions based on evidence and logic, not what a random YouTuber shilling 15 different tokens says.
Finally, remember that no strategy is one-size-fits-all. Diversification isn’t evil – it’s just often misapplied in crypto. A bit of diversification (holding a few assets) is still wise so you’re not betting everything on one coin’s success or failure. But beyond a certain point, adding more coins only adds more risk and headaches rather than safety. Even legendary investors warn against over-diversifying to the point that you’re effectively “indexing” the market without knowing it. In crypto, indexing the whole market can mean holding a lot of assets that just don’t perform.
Focused vs. Diversified: A Quick Comparison
To drive the point home, let’s compare a focused crypto portfolio vs. an over-diversified one with an example from recent performance:
Table: Focused vs. Diversified Crypto Portfolios – A focused portfolio of a couple of major coins greatly outperformed an over-diversified basket in 2023, with less complexity. Over-diversification diluted the returns and didn’t significantly reduce the risk since the coins moved together in downturns.
Conclusion
For beginner crypto traders, it might sound counterintuitive that “don’t put all your eggs in one basket” could lead you astray. But as we’ve seen in 2023–2024, putting your eggs in too many baskets in the crypto world can leave you with a lot of rotten eggs and not much to show for it. Diversification is still a valid concept – you just have to apply it carefully and not overdo it. Crypto is a unique market where the traditional rules don’t always work the same way.
Instead of buying 50 random coins hoping one makes you rich, you’ll likely be better off picking a few solid ones, managing your risks, and ignoring the noise of every new “hot” token. Focus on quality, keep learning, and remember that sometimes less is more when it comes to investing. By concentrating your crypto portfolio wisely and not over-diversifying, you give yourself a better chance to actually profit and sleep soundly at night, which is the ultimate goal for any investor – beginner or pro.
And remember — this article is not financial advice. Always do your own research (DYOR). In fact, you can start by checking out helpful insights on blog.millionero.com. When you’re ready to trade, come try out spot and perpetual futures trading on Millionero. It’s fast, simple, and beginner-friendly.
Happy trading. Be smart out there.