A surprisingly high amount of retail traders believes that automation is just a tool for trading and nothing else. They often ignore the wide range of approaches to balancing a portfolio that can be used by people who extensively use automated trading systems and focus strictly on using bots limitedly without venturing outside of their comfort zones.

It is possible to use cryptocurrency algorithmic trading software to build a diverse portfolio capable of withstanding the feared volatility and delivering consistent results in the long run. These methods are quite simple and can be used by anyone!

What is a balanced portfolio?

One of the most important metrics in portfolio management is risk level. When you have a risky investment, you should be thinking about ways of hedging against obvious risks. For example, if you hold a large long Bitcoin position, you may think about protecting with short positions during price retracements just in case the trend is reversing. Another example is when you are bullish on multiple DeFi projects in the Ethereum ecosystem, but want to insure your investments by also putting some money in tokens of competing networks like Cardano.

Investors continuously combat the economic uncertainty and implied market volatility when trying to create a balanced portfolio with sustainable risk/reward ratios. The task becomes quite challenging as you expand the portfolio by including more assets and searching for various hedging mechanisms.

Diversification is a continuous process that also involves systematic revisions of the portfolio composition. In some cases, you can use services of highly specialized platforms like Shrimpy. Its rebalancing tool gradually sells and buys assets as market conditions change to maintain a healthy balance.

On the other hand, you can run much better systems like statistical arbitrage by employing automation. A decade ago, investors had to work with teams of professionals to identify correlated assets, create dozens of simultaneous market positions, and rebalance their portfolios after each revision. Today, a single investor can create a complex statistical arbitrage system with enough dedication and knowledge.

Cryptocurrency algorithmic trading platforms for portfolio diversification

Since you can use a variety of approaches to diversify a portfolio, it is important to use a flexible automation platform that offers a wide range of tools to make the process easier. The automation industry is saturated with offer so picking the right company to work with can be challenging.

Here are some qualities you should look for:

  • Comprehensive navigation and controls. The importance of user interface is hard to overstate. When you do not feel intimidated by the sheer complexity of your dashboard, it is much easier to build sophisticated trading systems.
  • Ready-to-go preset solutions. DCA and GRID bots, templates for automated trading systems, and other similar products help newcomers orient themselves in the complicated world of crypto trading while adding a new dimension of flexibility to experienced veterans seeking simple trading strategies to complement their portfolios.
  • Affordable pricing. With the current level of technology, there is no need to overpay for software. You can find good platforms that have a plethora of interesting products to offer without overcharging. The times when you needed to pay thousands of dollars for a chance to use untested automation software are long gone. Look for platforms that do not scare you with prices.
  • Integration with centralized exchanges. Since all CEX marketplaces feature a different set of cryptocurrencies, you will have more variety when working with an automation vendor that can connect to several hugely popular platforms like Binance, Kraken, OKX, and more.

Using cryptocurrency trading bots to diversify a portfolio

There are several interesting ways to use automated trading systems to diversify any portfolio regardless of its current composition. You just need to think outside of the box and imagine ATS as both an instrument and an asset class.

Here are some ideas on how to use automated trading systems for diversification purposes:

  • Use DCA bots on the spot market to build up long positions. If you need to bring some balance to a portfolio but you want to cut down the cost of investment, using the distributed cost average strategy is the way to go. Companies like WunderTrading have preset DCA bots that can be used in the spot market and for margin trading accounts.
  • Employ complex strategies like statistical arbitrage. This method is often used to continuously balance a portfolio. The approach suggests finding correlated assets that can be grouped by certain metrics (volatility, trading volumes, behavior, etc.) and included in a portfolio. You will need to run multiple bots to make it work.
  • Think of preset systems like GRID as a separate asset class. Since you can control the risk level of the strategy while also setting specific profitability goals, it can be added to the portfolio as a separate class of assets and treated as such. The WunderTrading dashboard has a special analytical section where you can assess the performance of each bot.
  • Try social trading to bring more balance to a portfolio. The marketplace of retail traders whose actions you can copy using bots usually features experienced investors with wildly different approaches to investing in crypto. Automated trading bots copying actions of conservative traders will have a lower risk profile while those following aggressive traders will have higher a risk profile.
  • Allow automation to take control over a portfolio. Some experts believe that AI bots for trading are good enough to outperform human traders consistently. While we advise caution and careful exploration of AI-assisted automated systems, you may make a big bet that they are already at the level necessary to consistently bring in profits.

All these methods can be used to balance a portfolio and make it resilient against volatility and uncertainty associated with the cryptocurrency market. It is recommended to use automation sparingly and never rely on it too heavily. Being careful with tools that you do not fully understand yet is always a good idea!

Automated trading systems are excellent for many purposes and will be useful to both newcomers to the industry and seasoned veterans.