What is Diversification?

In finance, diversification is the practice of spreading investments across different assets – such as stocks, bonds, commodities, or cryptocurrencies – to reduce risk. A diversified portfolio balances gains and losses, creating more stable long-term returns.

Diversification can happen within one asset class (e.g., holding various cryptocurrencies) or across multiple classes (e.g., mixing crypto, equities, and commodities). The key is choosing assets with low or negative correlation, so they don’t all move in the same direction.

While diversification lowers downside risk, it can also limit upside potential compared to concentrating on a single high-performing asset.