Diversification is a correlation bet, not a coin count
Owning ten coins that all move with Bitcoin is one position, not ten. Real risk reduction comes from low or negative correlation. Size the blended position on the volatility position-size calculator and track total exposure on the portfolio heat calculator.
How much your coins move together
Correlation runs from −1 (perfect opposites) to +1 (lockstep). Most major cryptos correlate +0.6 to +0.9 with Bitcoin most of the time — meaning a "diversified" five-coin portfolio often behaves like 1.3 positions, not five. The combined volatility formula rewards low correlation heavily; at +0.9 it barely rewards splitting at all.
The regime problem: crypto correlations are unstable and rise toward +1 exactly during crashes, when diversification was supposed to earn its keep. Alt pairs that correlate +0.5 in calm months print +0.95 during a liquidation cascade. Portfolio construction using calm-period correlations understates crash risk systematically.
What actually diversifies: within crypto, very little — BTC vs. small caps at best decorrelate modestly. Real decorrelation requires leaving the asset class (stables deployed to yield, equities, metals) or holding strategies rather than assets (a short-biased or market-neutral sleeve). Two coins with a +0.85 correlation are a conviction, not a portfolio.