Looking to invest in crypto? Avoid these 4 common pitfalls.

Wall Street money managers have been buying it, El Salvador has adopted it as legal tender, and the US might start stockpiling it under Donald Trump

Bitcoin has been on fire recently — drawing more attention from potential investors. Robert Cannon, a financial advisor at Experity Wealth with a specialization in alternative assets, has seen fresh interest in bitcoin and cryptocurrency in general in recent weeks after the election.

Before diving in, however, it’s important to realize crypto is a speculative asset class. Don’t be fooled by bitcoin’s meteoric gains as it approaches $100,000 — there are plenty of ways to lose money if you aren’t careful.

“The landscape for the next four years looks really strong, and I believe we’re going to be in a major bull market for bitcoin and other cryptocurrencies,” Cannon said, adding: “Where there’s potential, there’s risk.”

Here are a few of the most common pitfalls for beginner crypto investors and how to avoid them, according to Cannon.

Overallocating to crypto

In the last decade or so, crypto — and bitcoin in particular — has gained more mainstream acceptance. That doesn’t mean its a safe asset.

“If I told you you could lose everything, how much would you put in there?” Cannon said.

One mistake he sees, especially among young investors, is being too bullish and dedicating too much of one’s portfolio to crypto.

It depends on the individual’s age, financial needs, and risk tolerance, but Cannon generally recommends allocating anywhere from 1% to 10% of one’s portfolio to crypto.

Not having an exit strategy

In Cannon’s experience, some investors are under the impression that the price of bitcoin will shoot up to a million dollars, leading them to hold on to assets for too long without taking profit. But with an inherently risky asset like crypto, having an exit strategy to take profits is crucial.

It’s good practice to go into a crypto investment with a rough idea of how much money you’re looking to make or willing to lose, as well as an investment time period. For example, you might decide that you’ll exit your position once you double your initial investment, or you could set up a stop-loss to automatically close out of a position if your asset falls below a certain price.

If you’re a lucky crypto investor riding a big price surge, it’s smart to cash out at least enough to cover your initial investment, he said.

Buying highly speculative coins

There’s no shortage of different coins out there, but not all cryptocurrencies are made equally

If investors decide to dabble in crypto, Cannon’s advice is to start with the basics and invest in bitcoin.

“Everything else is super speculative, and you can really lose all of your money in a few days, so I think bitcoin is the best opportunity for stability,” Cannon said of cryptocurrency.

Investors can purchase bitcoin through cryptocurrency exchanges such as Coinbase or Robinhood. Some investors like more control over their assets and opt for a self-custody wallet.

There are also ways to invest in crypto beside the direct purchase of coins, Cannon pointed out, such as buying a bitcoin ETF. It’s less risky than buying cryptocurrency outright and doesn’t involve a personal wallet.

Examples of bitcoin ETFs include the iShares Bitcoin Trust (IBIT), the Fidelity Wise Origin Bitcoin Fund (FBTC), and the Franklin Bitcoin ETF (EZBC).

Not thinking about cryptocurrency tax implications

Similar to stocks, you’ll need to pay capital gains taxes on crypto transactions. But since crypto is still nascent, certain tax laws are still being developed.

If you purchase crypto on a crypto exchange, you’ll typically be issued a cryptocurrency Form 1099 to fill out. However, there aren’t explicit rules stipulating that crypto exchanges must provide these documents to customers, according to Charles Schwab, meaning that you might not get any forms at all. Even if you don’t get a tax document, you’re still on the hook for any taxes and must report your gains to the IRS.

New legislation starting in 2025 will require crypto exchanges to issue Form 1099-DA to track digital asset transactions. However, President-elect Trump also suggested eliminating capital gains taxes on crypto.

Tax implications are another reason buying bitcoin through an ETF is a good idea, Cannon said. That way, the security is treated the same as any other stock, simplifying your taxes at the end of the year.