Cryptocurrency Basics
Cryptocurrencies are digital assets secured by cryptography, operating on decentralized blockchain networks. Unlike traditional investments, crypto trades 24/7, has extreme volatility, and carries unique risks including regulatory uncertainty and technological vulnerabilities.
Important Risk Warning
Cryptocurrency is highly speculative and volatile. Prices can drop 50-90% in short periods. Never invest more than you can afford to lose entirely. This guide is educational, not financial advice.
Major Cryptocurrency Categories
Bitcoin
BTC
Store of ValueEthereum
ETH
Smart ContractsSolana
SOL
Layer 1Stablecoins
USDT, USDC
Stable ValueKey Characteristics
- Bitcoin (BTC): The original cryptocurrency, viewed as "digital gold" and a potential inflation hedge
- Ethereum (ETH): Platform for decentralized applications, DeFi, and NFTs
- Altcoins: All cryptocurrencies other than Bitcoin, ranging from established projects to speculative tokens
- Stablecoins: Tokens pegged to fiat currencies (usually USD), used for trading and yield generation
Crypto Portfolio Allocation
The first question is how much of your total portfolio should be in crypto. This depends on your risk tolerance, investment timeline, and financial goals.
Recommended Crypto Allocation by Risk Profile
Minimal Exposure
For risk-averse investors who want small exposure to potential upside without significant downside risk
Balanced Approach
For investors comfortable with volatility who want meaningful exposure while limiting overall portfolio impact
High Conviction
For experienced investors with high risk tolerance and long time horizons who believe strongly in crypto's future
The 5% Rule
Many financial advisors suggest capping crypto at 5% of your total portfolio. This provides meaningful upside if crypto performs well, while limiting damage if it crashes 80%+ (which has happened multiple times historically).
Crypto Diversification Strategies
If you decide to invest in crypto, how should you allocate within your crypto portfolio? Here are three common approaches:
Strategy 1: Bitcoin Only
Bitcoin Maximalist Portfolio
Pros: Simplest approach, most established asset, lowest counterparty risk
Cons: May underperform in altcoin rallies, concentrated risk
Strategy 2: Bitcoin + Ethereum Core
Blue-Chip Crypto Portfolio
Pros: Exposure to two largest networks, different use cases
Cons: Correlated assets, both still highly volatile
Strategy 3: Diversified Portfolio
Diversified Crypto Portfolio
Pros: Broader exposure to crypto ecosystem, potential for higher returns
Cons: More complex, many altcoins fail long-term, higher risk
Security Best Practices
Security is paramount in crypto. Unlike traditional finance, there's no "forgot password" option—if you lose access or get hacked, your funds may be gone forever.
🔐 Essential Security Practices
Hardware Wallets
Store significant holdings in hardware wallets (Ledger, Trezor) that keep private keys offline
Seed Phrase Security
Write seed phrases on metal, store in multiple secure locations. Never store digitally or share with anyone
2FA Everywhere
Enable hardware 2FA (YubiKey) or authenticator apps. Never use SMS 2FA which can be SIM-swapped
Unique Passwords
Use a password manager. Every exchange and wallet should have a unique, strong password
Storage Options
- Hardware wallets: Most secure for long-term storage. Required for significant holdings
- Software wallets: Convenient but less secure. Good for small amounts and active trading
- Exchange custody: Convenient but you don't control keys. Use reputable exchanges only
"Not Your Keys, Not Your Coins"
When crypto is on an exchange, you're trusting them to safeguard it. Exchange hacks and bankruptcies (Mt. Gox, FTX) have cost users billions. Consider self-custody for holdings you can't afford to lose.
Crypto Tax Implications
Cryptocurrency is taxable property in most jurisdictions. Understanding what triggers taxes is essential for avoiding surprises and optimizing your tax position.
Taxable vs Non-Taxable Crypto Events
| Event | Taxable? | Notes |
|---|---|---|
| Buying crypto with fiat | No | Purchase establishes cost basis |
| Selling crypto for fiat | Yes | Capital gains/loss triggered |
| Trading crypto for crypto | Yes | Each swap is a taxable event |
| Spending crypto on goods | Yes | Treated as selling at market value |
| Receiving staking rewards | Yes | Taxed as ordinary income when received |
| Transferring between wallets | No | Same owner, no disposition |
| Gifting crypto | Maybe | Gift tax rules apply over thresholds |
Tax Optimization Strategies
- Hold for long-term rates: In many countries, holding >1 year qualifies for lower capital gains rates
- Tax-loss harvest: Sell losing positions to offset gains (check wash sale rules in your jurisdiction)
- Track cost basis: Use FIFO, LIFO, or specific identification to optimize which lots you sell
- Use tax-advantaged accounts: Some retirement accounts now allow crypto exposure
Portfolio Tracking
With crypto spread across exchanges, wallets, and DeFi protocols, tracking your portfolio and calculating taxes can be challenging. Good tracking software is essential.
What to Track
- Holdings: Total value across all wallets and exchanges
- Cost basis: Original purchase price for each acquisition
- Gains/losses: Realized and unrealized profit/loss
- Allocation: Portfolio breakdown by asset
- Transactions: Complete history for tax reporting
AllInvestView for Crypto Tracking
AllInvestView supports comprehensive crypto portfolio tracking:
- Import transactions from major exchanges (Coinbase, Binance, Kraken)
- Track holdings across multiple wallets and exchanges
- Automatic price updates for thousands of cryptocurrencies
- Calculate cost basis using FIFO, LIFO, or specific identification
- View crypto alongside stocks, bonds, and other assets in one dashboard
- Generate tax reports for capital gains calculations
Frequently Asked Questions
Most financial advisors suggest limiting crypto to 1-5% of your total portfolio due to its high volatility. Some aggressive investors allocate up to 10%, but never invest more than you can afford to lose entirely. Start small and increase only as you become more comfortable with the volatility.
A Bitcoin-heavy approach (50-70% BTC) is generally safer for beginners. Bitcoin has the longest track record and is most likely to survive long-term. Diversifying into Ethereum and a few other established projects can improve risk-adjusted returns, but avoid spreading too thin across speculative altcoins—most will go to zero over time.
Every crypto sale, swap, or spending event is a taxable event in most jurisdictions. Track your cost basis for each purchase and calculate gains/losses for each disposition. Use portfolio tracking software like AllInvestView that calculates crypto taxes automatically, imports transactions from exchanges, and generates tax reports.
Yes, if you hold significant amounts. Hardware wallets provide the best security by keeping private keys offline, immune to online hacks. For smaller amounts or frequent trading, reputable exchanges with strong security (2FA, insurance) are acceptable, but remember: not your keys, not your coins.
Dollar-cost averaging is excellent for crypto due to extreme volatility. By investing fixed amounts regularly (weekly or monthly), you avoid trying to time the market and reduce the impact of buying at peaks. DCA has historically outperformed lump-sum investing in volatile assets for most investors.