In this lesson
- find out why three cryptocurrencies in a portfolio do not spread the risk
- calculate how many independent bets you really have
- set a cap on the total risk of correlated positions
You risk 1% per trade and have three open: Bitcoin, Ether and Solana. 3% in total, but spread out – three different coins, three different stories. Except you know from the second lesson that these three move very similarly. When the market falls, all three stop-losses often trigger at once. You do not have three bets of 1%. You have one bet of 3%.
What the data shows#
Daily data from January 2021 to September 2025 (Binance):
- Of the 80 days when Bitcoin fell more than 5%, all three coins fell on 72. A portfolio of all three in equal parts lost 8.1% on average – more than Bitcoin alone.
- On the worst day, 19 May 2021, Bitcoin lost 15%, the three-coin portfolio 27%.
- The annual volatility of Bitcoin alone was 59%, of the three-coin portfolio 75%.
Adding more cryptocurrencies did not lower the risk, it raised it: you added coins that move in the same direction, only more sharply.
How many bets you really have#
Real diversification only works with things that do not move together. A simple formula gives a rough estimate:
number of independent bets ≈ n ÷ (1 + (n − 1) × ρ)
where n is the number of positions and ρ the average correlation between them.
| Positions | Average correlation | Independent bets |
|---|---|---|
| 3 independent | 0 | 3 |
| Bitcoin, Ether, Solana | 0.68 | about 1.3 |
| 10 altcoins | 0.7 | about 1.4 |
| Bitcoin, Ether, Solana in 2022 | 0.84 | about 1.1 |
Ten altcoins in a portfolio are therefore the risk of about one and a half positions, not ten. And in a downturn, when spreading would be needed most, correlation rises: in 2021 it averaged 0.55 between these three coins, in the bear year of 2022 already 0.84.
How to work with it#
- Add up the risk of correlated positions. Treat all long crypto positions as one bet on the crypto market.
- Set a cap on the total risk. For example: a single trade at most 1%, all correlated positions together at most 2%. The third trade then either does not happen, or all of them get smaller.
- Look for genuinely different sources of results. A different type of strategy (trend following and mean reversion often make money in different periods), a different timeframe, or simply cash and stablecoins that do not fall with the market.
A short position is not automatically a hedge
A long on Solana and a short on Bitcoin look like a balanced pair. But Solana swings almost twice as much – in a downturn you lose more on the long than you make on the short. A hedge has to be calculated, not eyeballed.
Common myths#
- "I have ten different coins, I am diversified." You have one bet on the crypto market in ten wrappers.
- "Every trade has a 1% stop-loss, I cannot lose more." In a crash they all trigger at once – and with slippage, it is worse.
- "A correlation of 0.6 is low." In a calm market, maybe. In a crash it tends to be much higher.
Summary
- Cryptocurrencies move together: three positions on the major coins are roughly one bet.
- Number of independent bets ≈ n ÷ (1 + (n − 1) × ρ); at a correlation of 0.7 it never exceeds about 1.4, however many positions you add.
- Add up the risk of correlated positions and set a cap for it.
- Real spreading comes from a different type of strategy, timeframe or cash – not another altcoin.