Diversify or concentrate: how many coins should a beginner hold

I've seen two kinds of beginners with exactly opposite flaws. One is the "true believer," who picks one coin and pours in spare money, even money that shouldn't be touched, holding on through any drop because "I believe in it." The other is the "cast-a-wide-net" type, terrified of missing the next hundred-bagger, with thirty or forty small coins they can't even pronounce stuffed into their wallet, feeling extra diversified and extra safe. Then one big drop comes along, and both end up just as battered: the first because they bet wrong on one, the second because those thirty or forty coins were really thirty or forty skins on the same thing. This piece is about how many coins an ordinary person should actually hold.

Let me put the ugly part up front: crypto is extremely volatile. Getting cut in half in a short stretch, or worse, is normal, and you can absolutely lose everything you put in. Diversified or concentrated, neither changes the high risk of this market as a whole. This piece is only about how to be less foolish inside that high risk. Everything below rests on one assumption: only spare money, your own decisions. This is not investment advice, and it recommends no specific asset.

Two common extremes

Let's lay the two extremes out clearly. The first is all in on one. Every chip on a single asset. Bet right and it feels great, but you've tied your entire worth to the fate of one thing. If it has any trouble, going to zero, blowing up, or grinding down for a long time, you have no buffer at all. In a market where even majors can get cut in half, putting everything on one is amplifying the cost of "being wrong once" to the maximum.

Careful "I really believe in it, so I'm all in." Believing in something and whether you should bet heavily on it are two separate questions. You can believe in something and still not put your entire worth on it. The more confident you are, the more you should remind yourself: what if I'm wrong this time? Leaving a way out for "being wrong" matters far more than betting "this time it's definitely right."

The second extreme is buying a big pile to fake diversification. These people have heard "don't put all your eggs in one basket," so they buy dozens of coins and figure they're safe now. Unfortunately, they've mistaken "the number of baskets" for diversification, without checking whether those baskets are all tied to the same rope. Let's unpack this misunderstanding next; it's sneakier than the first extreme, because it wears the coat of "I'm being careful."

Why buying dozens of alts is "fake diversification"

Real diversification isn't about "how many you bought," it's about "whether these few will collapse together." If the big pile you bought all jumps off the cliff hand in hand when it drops, then buying ten or buying one means you're carrying the same risk. You've just split the same bet into many pieces.

Term Fake diversification: appearing to hold many assets, but those assets are highly correlated and move in almost the same direction, so the risk isn't actually spread. The "many" in numbers masks the "concentration" in risk.

This problem is especially severe in crypto. A huge number of small coins have no independent value support, and their prices largely follow the broad market's mood: the broad market rises and they rise, the broad market drops and they often drop harder. So when you buy thirty or forty of these small coins, you think you've diversified into thirty or forty directions, but you're really still betting on one direction, "the broad market up," dressed up in thirty or forty names. When the systemic drop comes, they'll all turn red for you in unison.

Worse, fake diversification brings a hidden cost: you simply can't keep up with them. Thirty or forty assets, and there's no way you understand each one or track each one. The result is that most were bought in a muddle and held in a muddle, and you can't even say what you've bet on. That leads straight to the two things you actually should be looking at: correlation, and the limit of your own attention.

Correlated coins should count as one

There's a far more reliable way to judge whether you're really diversified than "counting how many": look at correlation, and count highly correlated coins as one.

Term Correlation: the degree to which two assets' prices rise and fall together. High correlation means they almost always move in step; low correlation means when one rises, the other doesn't necessarily follow. From a risk-spreading view, only holding assets with relatively low correlation truly delivers the "if one's dark, the other's still lit" effect.

How do you use this idea? Simple: when you take stock of your holdings, don't count them one by one, ask "will these fall together in the same move." Whatever falls together, however many there are, treat as one from a risk view first. Run this and a lot of people get a fright. They thought they held a dozen or so and were well diversified, but after merging by correlation, they find they've really bet on one or two directions. That "true concentration after merging" is the number you should care about.

This also tells you which direction to push diversification: not by simply buying a few more, but by asking "is anything I hold genuinely different, something that won't collapse along with the broad market." In crypto, a market that moves so much in lockstep, finding something genuinely low-correlation isn't easy, and that's exactly the point. For ordinary people, the protection diversification can offer is limited to begin with, and the more realistic protection actually comes from not having too heavy a position, which we'll get to at the end.

Don't hold more than you can keep up with

The second thing to look at is the limit of your own attention. This one is plain but badly underrated: the number you hold shouldn't exceed what you can continuously watch and roughly explain.

The reasoning is straightforward. Every extra asset is one more stream of information to track: what's happened to it lately, whether it's run into trouble, whether your original reason for buying still holds. An ordinary person's time and attention are limited, and past some number you can only leave things unattended. The holdings you can't keep up with are essentially "held blind," holding something you no longer understand and won't even know if it goes wrong, which is little different from holding with your eyes closed.

Exactly how many counts as "keepable" varies by person and by how much time you're willing to spend. But here's a useful reverse test: pick any holding at random, can you immediately say why you bought it and whether you should still hold it? If you can't answer for more than half, that isn't diversification, it's loss of control, and the fix is to cut down to a number you can manage, not to add a few more.

A middle path for ordinary people

Put the points above together, and here's a middle path an ordinary person can use directly, avoiding both extremes:

First, don't hold more than you can keep up with. Few and clear beats many and muddled. Better to hold just a few you genuinely understand than to stuff in a pile of unfamiliar names just to "look diversified."

Second, treat highly correlated ones as one. When taking stock, merge by "will they fall together," and see your true concentration clearly. Don't be fooled by the large number of holdings.

Third, keep majors as the bulk. Put a bigger proportion in the majors you relatively understand and that have better liquidity, and keep those more volatile, higher-risk small coins to a small proportion that you wouldn't mind losing entirely. That way, even if some small coin goes to zero, it only scratches the surface.

Careful This is only a framework for thinking, not an allocation recommendation, and certainly not a recommendation of any specific asset or ratio. What "majors" in "majors as the bulk" means, and how much, you have to judge for yourself based on your own understanding and tolerance. Don't believe anyone who promises that "allocating this way is sure to profit." This article promises no return either.

Diversification is the means; surviving is the goal

One honest last word. Diversification's effect for a crypto beginner is actually limited, because so many things in this market are highly correlated, and when a systemic crash comes, diversification won't save you much. So don't treat diversification as a talisman, thinking "if I spread enough, I'm safe." What truly keeps you standing in a big drop is never how many coins you hold, but that the total amount you put in was never heavy in the first place, spare money you could lose entirely without affecting your life.

Put another way, diversification is the means and surviving is the goal. Get your position down to a level where you can sleep first, and then, on that basis, do some limited diversification with "don't exceed what you can track, count correlated coins as one, keep majors as the bulk." Don't reverse the order. This market isn't short of opportunities. What it's short of is a you who still has capital and can still stay calm. Take it slow, and learn not to lose first. Next, I'd suggest reading how much should you put in on your first buy, to nail down the more important matter of total position first.