In Brief:
| Pros | Cons |
| High potential returns | Extreme volatility and risk |
| Portfolio diversification | Regulatory uncertainty |
| 24/7 market access | Security risks and hacking |
| Decentralization and autonomy | No consumer protections or insurance |
| Accessibility and inclusivity | Complex technology and steep learning curve |
| Lower transaction costs | Tax and reporting burdens |
| Innovative technology exposure | Scams, fraud, and unproven projects |
| Staking and passive income | Environmental impact (for some coins) |
NOTE: Because of the extreme volatility, security risks, minimal regulation, and prevalence of scammers and fraud, we recommend a high level of caution for people considering making crypto part of their investment portfolio. Do your due diligence on what you are buying and with whom. For most of those who choose to invest in crypto, we recommend devoting only a small portion of your assets (generally < 5%).
Cryptocurrencies have evolved from a niche digital curiosity into a dynamic, trillion-dollar asset class. The crypto market is more mature, regulated, and accessible than ever, attracting everyone from retail investors to global institutions.
Yet, the promise of high returns still comes with significant risks, volatility, and complexity.
Cryptocurrency is a digital or virtual currency that uses cryptography for security and operates on decentralized blockchain networks.
Unlike traditional currencies issued by governments, cryptocurrencies are not controlled by any central authority. The most well-known example is Bitcoin, but thousands of other “altcoins” exist, including Ethereum, Solana, and stablecoins like USDC.
I am a true believer in the advantages and savings that blockchain technology will bring to our economy and society in the coming years. Of that, I have complete confidence.
My views on cryptocurrencies—which have blockchain underpinnings—however, are more nuanced. I don’t think crypto is all a sham, but it has clearly attracted plenty of shady characters, and widespread benefits of crypto have yet to happen, so there is reason to be cautious.
Of greatest relevance for you is the appropriate place for crypto in an investment portfolio, if any. The first thing investors should be aware of is that there are different categories of cryptocurrencies.
The primary group of cryptocurrencies are those with a fundamental financial or technological utility. These include:
1) Payment cryptos like Bitcoin, Dogecoin, Litecoin and others generally have a finite number of coins. In theory—and increasingly in reality—such coins can be used as a way to pay for any kind of goods, services, or other financial obligations.
2) Utility tokens (also sometimes called “infrastructure tokens”) most notably include Ethereum. These have a specific function they are created for and do not have a finite number of coins. So, like a governmental currency, when a lot more gets printed, these will tend to be inflationary over time.
3) Stablecoins have their value tied to a traditional currency (sometimes referred to as “fiat currencies” because governments can increase or decrease the supply at their fiat), typically the U.S. dollar or the Euro. Tether is the best-known and largest stablecoin. These avoid the drastic and sudden swings in valuation that we hear about so often with payment cryptos. But these still aren’t guaranteed. TerraUSD was a stablecoin that collapsed because the holdings backing it up were in risky assets. Central Bank Digital Currencies (CBDC) are one form of stablecoin, which is issued by a country and tied to the value of its currency. These are in the very early stages, but expect to hear more in the coming years, as there are advantages in terms of stability and traceability.
The second group is called “Meme Coins” because they are typically tied to some cultural fad (or “meme”). Unlike the group above, these do not have any underlying intrinsic value. Many of these are started on a whim or even as a joke.
In effect, these are collectibles that are purchased from the issuing party, who immediately makes money. Everyone else, beware. As long as interest and demand stay high, you MAY be able to resell them for more than you purchased them.
But don’t count on it.
At some point, the music will stop, and someone will be left holding these coins that no longer have a market. If this is your idea of entertainment or you want to support a cause of the issuing party, then buy them. Just don’t think of them as an investment.
The next thing to think about with crypto is that it generally aligns with bull markets. When the stock market is running strong, crypto tends to do well. When the market turns down, crypto does too—sometimes quite hard.
Cabot’s 5 Rules for Investing in Crypto
- Do NOT invest in Meme Coins. As noted above, these aren’t investments. I’m not saying don’t buy them (although I personally won’t), just that you should not consider these to be part of your investment portfolio.
- Do your due diligence before buying any crypto. Is it solid? What is the value based on? What is the underlying thesis?
- Buy early in bull markets. Wait until the trend has been clearly established. Once you’ve bought, watch closely. Be prepared to sell much—or even all—of the position upon a sharp rise. Take your profits and move on. And pause your buying when the market turns bearish.
- Don’t get greedy. Investors often hate selling only to see an asset continue to rise in value, but it’s better to sell before a peak and lock in profits than leave the party too late, having watched the value fall off a cliff. I see this all the time with equities, and it’s an even bigger risk with crypto because of the greater volatility.
- Consider buying and holding. If you think crypto is destined to gradually ratchet up in value in the long run, you can buy early in a bull run or on any substantial dip. If that’s your strategy, don’t check the value every day. You’ll drive yourself crazy as you see sometimes-massive fluctuations up and down (ouch!). If this is your strategy, I recommend buying quality—Bitcoin and possibly Ethereum would be at the top of my list.
How Does Cryptocurrency Work?
- Blockchain: Transactions are recorded on a distributed ledger (blockchain), ensuring transparency and security.
- Mining/Staking: New coins are created and transactions validated via mechanisms like Proof of Work (mining) or Proof of Stake (staking).
- Wallets: Digital wallets (software or hardware) store your crypto and allow you to send and receive funds.
Pros of Crypto Investing
| Pros | Cons |
| High potential returns | Extreme volatility and risk |
| Portfolio diversification | Regulatory uncertainty |
| 24/7 market access | Security risks and hacking |
| Decentralization and autonomy | No consumer protections or insurance |
| Accessibility and inclusivity | Complex technology and steep learning curve |
| Lower transaction costs | Tax and reporting burdens |
| Innovative technology exposure | Scams, fraud, and unproven projects |
| Staking and passive income | Environmental impact (for some coins) |
Cons of Crypto Investing
| Cons | Explanation |
| Extreme Volatility | Crypto prices can swing wildly, with double-digit moves in hours or days |
| Regulatory Uncertainty | Laws and regulations are evolving, and sudden changes can impact prices and access |
| Security Risks | Hacks, scams, and exchange failures can result in total loss of funds |
| Lack of Protections | No FDIC insurance or recourse if funds are lost or stolen |
| Complexity | Understanding blockchain, wallets, and security is challenging for newcomers |
| Tax and Reporting Burdens | Crypto transactions are taxable events in many countries; reporting can be complex |
| Environmental Impact | Some coins (like Bitcoin) require significant energy for mining |
| Irreversible Transactions | Mistakes in sending funds or lost or stolen private keys can mean permanent loss |
| Scams and Fraud | The space is rife with Ponzi schemes, phishing, and fake projects |
| Not Widely Accepted | Despite growth, crypto is not universally accepted for payments |
Tips for Crypto Investing
1. Decide How Much to Invest. The old adage about “never invest more than you can afford to lose” is even more important to keep in mind with crypto. Crypto is highly speculative. Experts recommend limiting your crypto exposure to 1–5% of your overall portfolio. It also makes sense to start small. You can invest as little as a few dollars or a fraction of a coin and build over time.
2. Choose a Cryptocurrency Exchange or Platform. Unlike stock exchanges, crypto exchanges don’t have a long history or the same level of regulation. In addition, some traditional brokers, like Fidelity, Robinhood and Schwab, now offer crypto trading.
When making your choice of provider, look for security features, fees, available coins, user experience, and regulatory compliance.
3. Select Your Cryptocurrencies. Stick with major coins like Bitcoin (BTC) and Ethereum (ETH), which are the most established and widely traded. Altcoins like Solana, Chainlink, and others offer innovation but carry higher risk.
4. Fund Your Account. To set up your account, you can deposit funds via bank transfer, debit card, wire transfer, or sometimes credit card (use with caution). Make sure to look into fees first. Exchanges charge for deposits, withdrawals, and trades. Compare costs before funding.
5. Make Your Purchase. Choose your coin, enter the amount, and confirm your purchase. Similar to stocks, you can set up market orders (buy at current price) or limit orders (buy at a set price). Keep in mind that you can buy fractions of coins, making crypto accessible at any budget.
6. Store Your Crypto Safely. This is VERY important. Online wallets provided by exchanges are convenient but vulnerable to hacks. If you lose your password, you can permanently lose your assets. If someone steals your password … you can permanently lose your assets. Hardware wallets stored offline are much safer for large holdings. Some exchanges and third-party providers offer insured custody for a fee, which may be a worthwhile expense, particularly for larger holdings.
7. Set an Investment Strategy
- Long-term holding: Buy and hold through volatility, betting on long-term adoption.
- Dollar-cost averaging (DCA): Invest a fixed amount at regular intervals to smooth out volatility.
- Active trading: Buy and sell based on market trends or technical analysis (riskier and requires expertise).
- Diversification: Spread your investment across several coins and asset types to manage risk.
8. Monitor Your Portfolio and Stay Informed. Use portfolio apps or exchange dashboards to track your performance. Crypto is sensitive to news, regulatory changes, and technological developments, so follow these closely. Much more closely than you follow your equity holdings.
If you feel things are going in the wrong direction, begin to trim your holdings. As with almost any investment, by the time there are clear headlines, you’ll be late, so don’t wait. And, as always, rebalance your holdings as your results, goals or the market change.
9. Understand Tax Implications. Selling or trading crypto at a profit is a taxable event in many countries and subject to capital gains. It is important to keep detailed records of all transactions for tax reporting. Crypto tax rules are complex and evolving, so it is very much worth considering consulting with a tax expert.
10. Beware of Scams and Frauds. Be skeptical of unsolicited offers, guaranteed returns, or “too good to be true” projects. Watch out for phishing, fake websites, and Ponzi schemes.
11. Don’t chase hype or meme coins. Many projects are pump-and-dump schemes or lack real utility. If you find a meme coin “fun,” you can buy it, but consider it a collectible, not an investment.
Alternative Ways to Invest in Crypto
- Crypto ETFs and trusts: Buy shares of funds holding Bitcoin or Ethereum for regulated, indirect exposure.
- Blockchain stocks: Invest in companies developing blockchain technology or holding crypto on their balance sheets.
- DeFi (decentralized finance) platforms: Lend, borrow, or earn yield on decentralized finance protocols (higher risk).
- Staking and yield farming: Earn passive income by supporting network security or providing liquidity (advanced, risky).
With crypto, we continue to see increasing institutional adoption, regulatory clarity, and technological innovation. Trends to watch include:
- Tokenization of real-world assets: Real estate, art, and more are being digitized on blockchains.
- Growth of synthetic assets: Platforms like Synthetix allow trading of synthetic stocks, commodities, and currencies.
- AI and blockchain integration: Enhances predictive analytics and automated trading.
- Stablecoins and CBDCs: Growth of digital dollars and central bank digital currencies.
Cryptocurrency investing offers unique opportunities for high returns, diversification, and participation in cutting-edge technology. However, it comes with significant risks—volatility, security, regulation, and complexity. The best approach is to start small, do thorough research, diversify, use secure storage, and only invest what you can afford to lose.
Key Takeaways:
- Crypto is highly volatile and speculative—limit your exposure and manage risk.
- Crypto tends to rise and fall with the market, so it is NOT A HEDGE and actually increases your exposure to volatility.
- Focus on established coins and projects with real-world utility.
- Use reputable exchanges and secure wallets.
- Stay informed about regulations, taxes, and technological developments.
- Diversify your holdings and have a clear investment plan.