Diversification Risk

Diversification risk occurs when a portfolio that is intended to be diversified becomes highly correlated during market stress. This is a common trap in the crypto market, where different tokens often move together due to shared liquidity pools and common investor sentiment.

If a portfolio lacks true non-correlated assets, it provides a false sense of security. Diversification risk is exacerbated by leverage, which can force liquidations across multiple assets simultaneously.

To manage this, investors must look for assets that react differently to macro events. It is a critical aspect of risk management that emphasizes the quality of assets over the quantity of assets.