What cryptocurrency to invest in depends on your risk tolerance, how much you can afford to lose, and whether you understand what you're buying
There is no single right answer to what cryptocurrency to invest in because cryptocurrencies behave differently from stocks or bonds. Bitcoin and Ethereum are the largest by market value and have the longest track records, but that does not mean they will outperform smaller coins. Smaller cryptocurrencies can move faster in either direction — gains or losses — and many will fail entirely. Before you pick any cryptocurrency, you need to understand that the entire value of a cryptocurrency rests on what other people will pay for it, not on earnings, assets, or cash flow the way a company does.
The practical starting point is this: only invest money you can afford to lose completely. Cryptocurrency markets can drop 50 percent or more in weeks. If you need that money for rent, a car payment, or an emergency, it does not belong in cryptocurrency.
Key Takeaways
- Bitcoin and Ethereum are the two largest cryptocurrencies by market value and have existed longer than most alternatives, but size alone does not predict future price movement.
- Smaller cryptocurrencies carry higher risk of total loss but can also move faster in price; many projects fail and become worthless.
- The value of any cryptocurrency depends entirely on what buyers will pay, not on underlying earnings or assets, which makes price swings unpredictable.
- You should only invest money you can afford to lose completely, because 50 percent price drops in a matter of weeks are not unusual.
- Storing cryptocurrency safely requires either a hardware wallet you control yourself or a reputable exchange, and each approach has different risks.
Bitcoin versus Ethereum and other major cryptocurrencies
Bitcoin was the first cryptocurrency and remains the largest by total value. It has a fixed supply cap of 21 million coins, which is written into its code. Ethereum is the second largest and works differently — it is a platform where other programs and contracts can run, and new Ethereum is created continuously. Both have been around since 2009 and 2015 respectively, which gives them longer histories than most alternatives.
Larger cryptocurrencies tend to be less volatile than smaller ones, but "less volatile" still means price swings of 20 to 40 percent in a single month are normal. Bitcoin and Ethereum have both dropped 70 percent or more from their peaks. If you are new to cryptocurrency, starting with one of these two is a common approach because they have more trading volume (easier to buy and sell) and more public information about how they work. But neither is a safe investment — they are speculative bets on future demand.
Thousands of other cryptocurrencies exist. Most are created by teams hoping to solve a specific problem or build a specific application. Many fail. Some are outright scams designed to take your money. The smaller the cryptocurrency, the easier it is for the price to be manipulated by a small group of large holders, and the higher the chance the project will be abandoned.
How to evaluate a cryptocurrency before investing
Start by understanding what problem the cryptocurrency claims to solve. Read the project's official documentation (called a whitepaper) and look for a clear explanation of what makes it different from Bitcoin or Ethereum. If you cannot understand the purpose after reading it, that is a warning sign — either the project is poorly explained or it may not have a real purpose.
Check who is running the project. Look for a team with public identities and a track record in technology or finance. Anonymous teams are not automatically disqualifying, but they make it harder to hold anyone accountable if something goes wrong. Search for news articles about the project and the team — both positive coverage and criticism. If you find only hype and no serious technical discussion, that is another warning sign.
Look at the cryptocurrency's price history. How much has it moved in the past year? The past five years? A coin that has been relatively stable is not necessarily safer — it might just be less popular — but a coin that has swung from $1 to $100 and back to $5 shows the kind of volatility you are signing up for. Check whether the project has a clear roadmap for what it plans to build next, and whether it has actually delivered on past promises.
Where to buy and store cryptocurrency safely
You buy cryptocurrency through an exchange — a website or app that lets you trade regular money for cryptocurrency. Major exchanges include Coinbase, Kraken, and Gemini. Smaller exchanges exist, but using a well-known exchange with a long track record reduces (but does not eliminate) the risk that the exchange itself will fail or be hacked.
After you buy cryptocurrency, you need to decide where to store it. Leaving it on the exchange is convenient but means the exchange controls your coins — if the exchange is hacked or goes out of business, your coins may be lost. Moving it to a hardware wallet (a physical device like a USB drive that stores your cryptocurrency offline) gives you full control but means you are responsible for not losing the device or forgetting the password. There is no customer service to call if you lock yourself out.
If you choose a hardware wallet, write down your recovery phrase (a list of words that can restore your wallet if the device is lost) and store it somewhere safe and separate from the device itself. Do not store it on your computer or phone. Do not take a photo of it. If someone gets that phrase, they can steal all your cryptocurrency.
Diversification and position sizing in cryptocurrency
Diversification means spreading your money across different investments so that one failure does not wipe you out. In cryptocurrency, diversification might mean holding both Bitcoin and Ethereum rather than putting everything into one coin, or holding cryptocurrency alongside stocks and bonds. But cryptocurrency as a whole is a high-risk asset class, so diversifying within cryptocurrency alone does not protect you the way diversifying across stocks, bonds, and real estate does.
Position sizing means deciding how much of your total money to put into any single investment. A common rule for high-risk investments is to put no more than 5 to 10 percent of your total portfolio into any single speculative bet. If you have $50,000 in savings and you want to invest in cryptocurrency, putting $2,500 to $5,000 into it means you can afford to lose that money without derailing your life. Putting $40,000 into it means a 50 percent drop leaves you with $20,000, which may force you to sell at the worst time.
Tax reporting for cryptocurrency investments
The IRS treats cryptocurrency as property, not currency. That means every time you sell cryptocurrency or trade it for another cryptocurrency, you owe capital gains tax on the profit. If you bought Bitcoin for $30,000 and sold it for $50,000, you owe tax on the $20,000 gain. If you bought it for $50,000 and sold it for $30,000, you can claim a capital loss.
You need to report every transaction, including small trades. If you bought and sold cryptocurrency 100 times in a year, you need to report 100 transactions. Exchanges provide tax forms (usually a 1099-K or similar document) at the end of the year, but you are responsible for making sure your tax return is accurate. Failing to report cryptocurrency transactions can result in penalties and interest.
Keep records of every purchase and sale, including the date, amount, price, and what you did with the cryptocurrency. If you received cryptocurrency as a gift or as payment for work, that is also taxable income at the fair market value on the day you received it.
Red flags that signal a cryptocurrency scam or failed project
Be suspicious of any cryptocurrency that promises may provide returns or claims it will make you rich. Legitimate investments do not may provide anything. Be suspicious of pressure to buy quickly or claims that an opportunity is "limited time" — scammers use urgency to stop you from thinking clearly.
Watch for celebrity endorsements or influencers promoting a cryptocurrency. Many influencers are paid to promote coins and do not disclose it. If a celebrity or social media personality is pushing a specific cryptocurrency, assume they have a financial incentive to do so and that the coin may be overvalued.
Be wary of coins that claim to be backed by a famous person or company but are not actually affiliated with them. Scammers create fake versions of popular projects. Check the official website and social media accounts directly rather than clicking links from social media posts.
If a project's website is poorly designed, full of spelling errors, or vague about how it actually works, that is a warning sign. Legitimate projects invest in clear communication because they want people to understand what they are building.
Frequently Asked Questions
Should I invest in cryptocurrency if I have debt?
No. Pay off high-interest debt like credit cards first. The interest you pay on credit card debt (often 15 to 25 percent per year) is almost certain to cost you more than cryptocurrency gains. Once you have paid off high-interest debt and built an emergency fund of three to six months of expenses, then you can consider cryptocurrency with money you can afford to lose.
Is it too late to invest in Bitcoin or Ethereum?
That depends on your belief about future price movement, which nobody can predict. Bitcoin has gone up and down many times over its history. Some people who bought at $60,000 lost money when it dropped to $16,000. Others who bought at $16,000 made money when it rose again. The price could go higher or lower from today — there is no way to know.
What is the difference between investing and trading cryptocurrency?
Investing usually means buying and holding for months or years, betting that the price will go up over time. Trading means buying and selling frequently, trying to profit from short-term price swings. Trading is harder than it looks, costs more in fees, and most people who try it lose money. If you are new to cryptocurrency, holding is simpler than trading.
Can I lose more money than I invest in cryptocurrency?
No, not with normal buying and holding. If you buy $1,000 of Bitcoin and the price goes to zero, you lose $1,000. You cannot owe more than that. However, if you use leverage (borrowing money to buy more cryptocurrency than you can afford), you can lose more than your initial investment.
How do I know if a cryptocurrency exchange is safe?
Look for exchanges that have been operating for several years, are regulated in a major country, and have insurance or a fund to cover losses if they are hacked. Check whether the exchange has experienced major security breaches in the past. Read recent reviews from users, but remember that people who had bad experiences are more likely to leave reviews than people who had neutral ones.