Crypto investments depend on your risk tolerance, time horizon, and how much you can afford to lose

There is no single answer to what you should invest in because crypto assets behave differently, carry different risks, and suit different financial situations. Bitcoin and Ethereum are the largest by market value and have the longest track records. Smaller coins and tokens are more volatile and can move 50% or more in days. Stablecoins are designed to hold a fixed value but carry their own risks. Before you put money into any of them, you need to know how much you can afford to lose without affecting your ability to pay rent, cover emergencies, or meet other financial obligations.

This guide describes the main categories of crypto assets and what distinguishes them. It does not recommend any particular investment or tell you how much to buy. Those decisions depend on your personal finances, which only you can assess.

Key Takeaways

  • Bitcoin and Ethereum are the two largest cryptocurrencies by market value and have existed for over a decade, making them less volatile than newer coins.
  • Smaller altcoins and tokens can move 50% or more in a single day and carry higher risk of total loss, including if the project fails or the exchange closes.
  • Stablecoins are pegged to the U.S. dollar or other assets but are not insured like bank deposits, and some have failed or lost their peg.
  • You should only invest money you can afford to lose completely without affecting your housing, emergency fund, or ability to meet essential expenses.
  • Where you hold crypto matters: exchanges can fail or be hacked, and self-custody requires you to manage your own security and recovery.

Bitcoin and Ethereum: the two largest cryptocurrencies

Bitcoin was created in 2009 and remains the largest cryptocurrency by market value. Ethereum launched in 2015 and is the second-largest. Both have been through multiple boom-and-bust cycles, regulatory scrutiny, and technical challenges. Neither is backed by a government or company, and neither has a may provide value.

Bitcoin is designed primarily as a store of value and a payment network. Ethereum is a platform where other projects build applications and tokens. Both are traded on exchanges and can be held in wallets. The price of each fluctuates based on demand, news, regulation, and macroeconomic conditions. A 20% to 30% drop in a single month is not unusual.

Because they have existed longer and have larger user bases than newer coins, they are generally considered less risky than alternatives. That does not mean they are safe or that you will make money. It means the risk is somewhat more predictable and the liquidity (ability to sell quickly) is higher.

Altcoins and tokens: higher volatility and higher risk

Any cryptocurrency other than Bitcoin is sometimes called an altcoin. This category includes thousands of projects, from Litecoin and Dogecoin to newer tokens launched on Ethereum or other blockchains. Many are created by small teams or individuals with no track record. Some are abandoned after a few months. Others are outright scams designed to take your money.

Altcoins can move 100% or more in a week. A coin worth $1 today can be worth $0.10 next month, or it can disappear entirely if the project fails or the exchange delists it. You can also lose access to your coins if the exchange shuts down, gets hacked, or freezes your account. Unlike bank deposits, crypto holdings are not insured by the government.

Some altcoins do become valuable, and early investors can make large returns. But the odds are against you, and the potential for total loss is real. If you invest in altcoins, treat the money as gone from the moment you send it.

Stablecoins: designed to hold a fixed value, but not risk-free

Stablecoins are cryptocurrencies designed to maintain a stable price, usually pegged to the U.S. dollar. USDC, USDT, and DAI are among the largest. They are useful for moving money between exchanges or holding value without converting back to regular currency. But they are not the same as a bank account.

Stablecoins are only as stable as the assets backing them. USDC is backed by cash and short-term U.S. Treasury securities held by a regulated custodian. USDT (Tether) has been less transparent about its backing and has faced regulatory scrutiny. DAI is backed by cryptocurrency collateral and is more complex. If the backing fails or the stablecoin loses its peg, you can lose money even though the coin is supposed to be stable.

In 2023, several stablecoins failed or lost their peg, and investors lost money. Holding stablecoins on an exchange also carries the risk that the exchange fails or is hacked. They are useful tools but not a substitute for a bank account.

Where you hold crypto matters as much as what you hold

You can hold crypto on an exchange (like Coinbase or Kraken), in a self-custody wallet (like a hardware wallet or software wallet), or with a custodian. Each option has trade-offs.

Exchanges are convenient and let you buy and sell quickly, but they can fail, get hacked, or freeze your account. FTX, one of the largest exchanges, collapsed in 2022 and customers lost billions. Celsius and other lending platforms also failed. If your crypto is on an exchange when it fails, you may not get it back.

Self-custody means you control your own private keys and hold your crypto in a wallet only you can access. This removes the exchange risk but puts the burden of security on you. If you lose your password or recovery phrase, your coins are gone forever. If your computer is hacked or your phone is stolen, someone else can access your coins. Self-custody is more secure against exchange failure but riskier if you are not careful with your keys.

Custodians like Fidelity or Kraken Custody hold crypto on your behalf with insurance and security practices. This is more expensive but reduces some risks. It is not available for all cryptocurrencies or to all investors.

How to think about risk and your financial situation

Before you invest in any cryptocurrency, ask yourself: Can I afford to lose this money? If the answer is no, do not invest it. Crypto is volatile and can go to zero. If losing your investment would force you to take on debt, delay paying bills, or reduce your emergency fund, the amount is too large.

A common rule is to invest only what you can afford to lose completely. For some people, that is $100. For others, it is $10,000. Only you know your situation. If you have credit card debt, no emergency fund, or unstable income, crypto should not be part of your financial plan right now.

If you do decide to invest, start small and learn how the exchange or wallet works before moving larger amounts. Understand what you are buying and why. If you cannot explain it in plain language, you probably should not invest in it.

Diversification within crypto and outside it

If you invest in crypto, diversification means not putting all your money into one coin or token. Bitcoin and Ethereum are less correlated with each other than altcoins are, so holding both reduces some risk. But all cryptocurrencies are correlated during major market moves, so diversification within crypto is limited.

More important is diversification outside crypto. Your primary investments should be in your emergency fund, retirement accounts, and diversified stock or bond funds. Crypto should be a small part of your overall portfolio, if it is part of it at all. If crypto makes up more than 5% to 10% of your net worth, you are taking on more risk than most financial advisors recommend.

Frequently Asked Questions

Is Bitcoin or Ethereum a better investment?

Bitcoin and Ethereum serve different purposes and have different risks. Bitcoin is older and larger, making it less volatile. Ethereum is a platform with more use cases but also more technical complexity. Neither is objectively better; it depends on your view of their long-term value and your risk tolerance. Many investors hold both rather than choosing one.

Can I get rich quick with crypto?

Some people have made large returns on crypto investments, usually by buying early and holding through volatility. But many more have lost money. The odds are not in your favor, and "get rich quick" thinking is how people lose their savings. If an investment sounds too good to be true, it is.

What if I buy crypto and the price drops 50%?

You have lost money on paper, but you have not lost it permanently unless you sell. Crypto prices are volatile and can recover or fall further. If you invested money you could not afford to lose, a 50% drop can force you to sell at a loss to cover expenses. This is why investing only what you can afford to lose is critical.

Should I use a hardware wallet or keep crypto on an exchange?

Hardware wallets are more secure against exchange failure and hacking but require you to manage your own security and recovery. Exchanges are convenient but carry counterparty risk. If you are new to crypto, an exchange is simpler to start with. As your holdings grow, a hardware wallet reduces some risks, but only if you secure your recovery phrase properly.

What happens if the crypto exchange I use goes out of business?

If your crypto is on the exchange, you may lose it. Unlike bank deposits, crypto is not insured by the government. FTX customers lost billions when the exchange collapsed. If you hold large amounts, use an exchange with a strong reputation and consider moving some to self-custody or a regulated custodian.