Start with cryptocurrency safely by selecting a reputable exchange, understanding wallet types, learning about major coins, implementing security practices, and understanding tax reporting requirements.
Choose an exchange registered with FinCEN and compliant with U.S. regulations
U.S.-regulated exchanges must verify your identity (KYC) and follow anti-money-laundering laws. Using an unregulated offshore exchange risks losing your funds with no legal recourse. Check the exchange's registration on FinCEN's MSB registrant search.
Compare trading fees across exchanges (typically 0.1%-1.5% per trade)
Fees range from 0.1% for limit orders on advanced platforms to 1.5% on simple buy interfaces. Buying $1,000 in Bitcoin at 1.5% costs $15 in fees versus $1 at 0.1%. Use the exchange's advanced trading interface to get lower maker/taker fees.
Verify the exchange holds adequate reserves and insurance for digital assets
After several exchange collapses, proof-of-reserves matters. Look for exchanges that publish regular attestation reports from independent auditors. Some exchanges carry insurance covering a portion of digital assets held in hot wallets.
Complete identity verification (KYC) before funding your account
KYC requires a government-issued ID and sometimes a selfie. Verification takes 10 minutes to 48 hours depending on the exchange. Complete this before you need to buy—rushing during a market dip while waiting for verification is frustrating.
Understand Wallet Types
Learn the difference between hot wallets (online) and cold wallets (offline)
Hot wallets are apps or exchange accounts connected to the internet—convenient but vulnerable to hacking. Cold wallets are hardware devices that store your keys offline. For holdings under $1,000, an exchange is fine. Above $5,000, consider a hardware wallet.
Understand that 'not your keys, not your coins' means exchange custody has risks
When crypto is on an exchange, the exchange controls it. If the exchange is hacked or goes bankrupt, you may lose everything. Moving to a personal wallet gives you full control. Exchange insurance typically covers only a fraction of total deposits.
For significant holdings, purchase a hardware cold wallet
Hardware wallets cost $60-$150 and store your private keys on an offline device. They only connect to the internet when you initiate a transaction. Buy directly from the manufacturer's website—never from third-party resellers who may have tampered with the device.
Write down your seed phrase (12-24 words) and store it securely offline
Your seed phrase is the master key to your wallet. If you lose it, you lose access to your crypto permanently. Write it on paper or stamp it in metal. Never store it digitally (no photos, no cloud drives, no email). Keep copies in 2 separate secure locations.
Learn About Major Cryptocurrencies
Understand Bitcoin: the original cryptocurrency with the largest market cap
Bitcoin has a fixed supply of 21 million coins, with about 19.5 million already in circulation. It's the most widely accepted and most liquid cryptocurrency. Bitcoin's price has been extremely volatile, with 50%+ drops occurring in 2018, 2022, and multiple other years.
Understand Ethereum: the second-largest cryptocurrency with smart contract capability
Ethereum powers decentralized applications and most other crypto tokens. It transitioned to proof-of-stake in 2022, reducing energy consumption by 99%. Ethereum is more volatile than Bitcoin, with drops exceeding 60% during crypto winters.
Be extremely cautious with smaller altcoins and meme coins
Thousands of altcoins exist, and most lose 90%-100% of their value over time. Of the top 100 cryptocurrencies from 2017, fewer than 20 remain relevant. Limit altcoin exposure to money you can afford to lose entirely—treat it as speculation, not investing.
Only invest money you can afford to lose completely
Cryptocurrency is the most volatile major asset class. Bitcoin has dropped 80%+ multiple times. A $10,000 investment can become $2,000 within months. Financial advisors suggest limiting crypto to 1%-5% of your total investment portfolio.
Implement Dollar-Cost Averaging
Set a fixed dollar amount to invest in crypto on a regular schedule
Investing $50-$100 per week regardless of price smooths out volatility. Someone who invested $100 per week in Bitcoin since 2020 would have a significantly different outcome than someone who invested $10,000 all at once at a market peak.
Set up recurring purchases on your exchange
Most major exchanges offer automatic recurring buys (daily, weekly, or monthly). Set it and forget it. Automated purchases remove the emotional decision-making that causes most retail crypto investors to buy high and sell low.
Never invest a large lump sum at once in crypto
Crypto can drop 20%-40% in a single week. Spreading a $5,000 investment over 10 weeks ($500 per week) means if the price crashes 30% in week 3, you buy more at the lower price. Your average cost stays well below any single peak purchase.
Secure Your Accounts
Enable two-factor authentication (2FA) using an authenticator app, not SMS
SMS-based 2FA is vulnerable to SIM swap attacks where hackers port your phone number to their device. Authenticator apps generate time-based codes on your device and are far more secure. Set up 2FA on both your exchange account and your email.
Use a unique, strong password for your exchange account
Use a password manager to generate a random 20+ character password. Never reuse passwords from other sites. Crypto exchange accounts are prime hacking targets—a data breach on another site with a shared password can lead to exchange account compromise.
Enable withdrawal address whitelisting if available
Whitelisting means you can only withdraw crypto to pre-approved addresses. Adding a new address requires a 24-48 hour waiting period. If a hacker gains access to your account, they can't immediately drain your funds to their own wallet.
Be vigilant against phishing scams and fake support messages
No legitimate exchange or wallet company will ever DM you on social media asking for your seed phrase, password, or 2FA codes. Bookmark the real exchange URL and only access it via your bookmark. Phishing sites mimic real exchanges with near-identical URLs.
Understand Tax Reporting
Know that the IRS classifies cryptocurrency as property subject to capital gains tax
Selling, trading, or spending crypto triggers a taxable event. If you buy Bitcoin at $30,000 and sell at $45,000, you owe capital gains tax on the $15,000 profit. The rate depends on how long you held: under 1 year = income tax rate (up to 37%); over 1 year = 0%-20%.
Track every transaction with dates, amounts, and cost basis
You need the purchase price, sale price, and holding period for every transaction. With dollar-cost averaging, each purchase has a different cost basis. Crypto tax software can import exchange history and calculate gains automatically.
Report crypto on your tax return even if your exchange doesn't send a 1099
Starting in 2025, exchanges must report transactions to the IRS via Form 1099-DA. But even without receiving a form, you're legally required to report all gains and losses. The IRS asks about virtual currency transactions directly on Form 1040.
Harvest losses to offset gains if your crypto drops below your purchase price
Unlike stocks, crypto is not subject to the wash sale rule (as of 2024). You can sell at a loss, immediately rebuy, and still claim the loss on your taxes. A $5,000 loss offsets $5,000 in gains or up to $3,000 in ordinary income per year.
Frequently Asked Questions
How much money do I need to start investing in cryptocurrency?
Most exchanges allow purchases starting at $1-$10, so you do not need thousands to begin. Coinbase, Kraken, and Binance all support fractional purchases of Bitcoin and Ethereum. Starting with $50-$100 per month through dollar-cost averaging is a common approach for new investors.
What happens if a crypto exchange goes bankrupt?
If an exchange fails, customer funds may be tied up in bankruptcy proceedings for months or years, as happened with FTX in 2022 where users lost billions. This is why transferring crypto to a personal hardware wallet like Ledger or Trezor ($60-$150) is strongly recommended for holdings above $500. Unlike bank accounts, crypto exchange balances are not FDIC insured.
Do I have to pay taxes on cryptocurrency I have not sold?
In the US, you owe no tax on crypto you simply hold (unrealized gains). Taxable events occur when you sell, trade one crypto for another, or use crypto to buy goods and services. The IRS treats crypto as property, so gains held over one year qualify for lower long-term capital gains rates (0-20%) versus short-term rates matching your income bracket.
What is the difference between a hot wallet and a cold wallet?
A hot wallet is connected to the internet (mobile apps like MetaMask, exchange wallets) and is convenient for frequent trading but more vulnerable to hacking. A cold wallet is an offline device (Ledger Nano, Trezor) that stores your private keys without internet exposure. Most security experts recommend keeping day-to-day amounts in hot wallets and long-term holdings in cold storage.
How do I report cryptocurrency on my tax return?
The IRS requires reporting all crypto transactions on Form 8949 and Schedule D. Exchanges like Coinbase issue 1099 forms for users with significant activity, but you are responsible for tracking all trades regardless. Tax software like CoinTracker or Koinly can import your exchange history and generate the required forms, typically costing $49-$199 per year.