2. Assess Your Ability to Absorb Losses

Risk tolerance describes your comfort with uncertainty. Your ability to absorb losses depends on your income, expenses, savings, debts, and financial commitments.

Someone may feel comfortable taking risks but still be unable to afford a significant loss.

Moneysmart describes most crypto assets as high-risk investments with prices that can change sharply over short periods. It advises investors to be prepared to lose what they invest.

Avoid borrowing to build a crypto portfolio. Debt repayments remain due even if the assets purchased lose value.

3. Decide How Crypto Fits Into Your Overall Portfolio

Before dividing money between digital assets, consider your total exposure to cryptocurrency.

A portfolio containing many tokens can still be heavily concentrated in one asset class. Broader financial planning may involve cash, shares, bonds, superannuation, or other investments, depending on your circumstances.

There is no universal crypto allocation suitable for every Australian investor. Your decision should reflect your goals, financial capacity, and understanding of the risks.

If you need a personal allocation recommendation, seek appropriately licensed financial advice.

4. Research Each Asset Before Including It

An asset should have a clear reason for being included. Popularity, recent price increases, and social media attention are insufficient on their own.

Research:

• The asset’s purpose and practical use.
• How the network or project operates.
• Token supply and future issuance.
• Ownership concentration.
• Governance and control.
• Security incidents and technical risks.
• Trading liquidity.
• Whether the token gives holders any enforceable rights.
• Dependence on a particular company or service provider.

A successful technology project does not necessarily make its token a successful investment. Understand how demand for the token relates to the project’s actual use.

5. Look for Shared Risks Between Holdings

Different names do not necessarily mean different exposures.

Several assets may depend on:

• The same blockchain.
• The same exchange or custodian.
• A common stablecoin.
• The same lending protocol.
• Similar speculative demand.
• A bridge or shared technical infrastructure.

For example, holding a blockchain’s native token and several applications operating on that network may create substantial exposure to the same ecosystem.

Review how one failure could affect multiple holdings. Diversification is less effective when assets depend on the same underlying systems.

6. Understand Stablecoins Before Treating Them as a Buffer

Stablecoins aim to track a reference value, often a currency such as the US dollar. Their intended price stability does not make them equivalent to cash in an Australian bank account.

Relevant risks can include:

• Loss of the intended peg.
• Problems with reserves or collateral.
• Restrictions on redemption.
• Issuer or custodian failure.
• Smart contract vulnerabilities.

A US-dollar stablecoin also introduces exchange-rate exposure for someone measuring their portfolio in Australian dollars.

Understand the stabilisation mechanism, reserve information, redemption terms, and custody arrangements before including a stablecoin. Moneysmart describes several different stablecoin structures, including asset-backed and algorithmic models.

7. Set Limits on Concentrated and Speculative Positions

Written limits can help prevent an enthusiastic purchase from becoming a disproportionately large exposure.

Consider establishing rules for:

• The maximum exposure to one asset.
• The combined exposure to one ecosystem.
• Assets with limited liquidity.
• Highly speculative tokens.
• Lending, staking, or other arrangements that add risks.

There is no need to hold an asset from every crypto category. Adding an unfamiliar token purely to increase the number of holdings can make a portfolio harder to understand and manage.

A smaller group of researched assets may be easier to monitor than a large collection bought without a clear rationale.

8. Use a Consistent Purchasing Process

A planned purchasing process can help reduce impulsive decisions driven by short-term price movements.

Some investors use dollar-cost averaging, which involves investing set amounts at regular intervals rather than committing the entire amount at once.

This spreads purchases across different prices, but it does not guarantee a profit or prevent losses. Continuing to buy an unsuitable or failing asset can increase the amount at risk.

Review the investment case as well as the purchasing schedule. A regular contribution plan should remain affordable and account for transaction fees.

9. Review and Rebalance When Appropriate

Price movements can change portfolio weights even when you make no new purchases.

For example, an asset that initially represents 20% of your crypto holdings could grow to 40%. Your dependence on that asset would then be greater than originally intended.

Rebalancing means adjusting holdings towards your chosen allocation. This may involve changing future contributions or selling and buying assets.

Moneysmart explains that investment proportions can drift over time and that rebalancing helps restore a mix suited to the investor’s goals and risk appetite.

Before making changes, consider fees, liquidity, tax consequences, and whether the original allocation still makes sense.

10. Check Liquidity, Fees, and Withdrawal Conditions

A displayed market price does not establish that you can sell your entire holding at that price.

Assets with limited liquidity may have wide spreads or significant price changes when an order is executed.

Review:

• Trading fees.
• Buy-and-sell spreads.
• Network fees.
• Withdrawal charges.
• Minimum withdrawal amounts.
• Lock-up periods.
• Restrictions during platform disruptions.

Frequent small trades can create substantial costs. These costs should form part of your portfolio decisions rather than being reviewed only after a transaction.

11. Protect Your Assets and Account Access

Diversifying holdings does not protect against losing access to an account or wallet.

Use unique passwords, enable available multifactor authentication, and access platforms through independently verified websites or apps.

For self-custody wallets, protect recovery phrases and private keys. Understand how to back up and recover the wallet before transferring assets.

Keeping assets with a platform introduces reliance on that provider. Self-custody introduces responsibility for securing keys and making transactions correctly.

Using multiple wallets or providers may spread some operational exposure, but it also increases complexity. Choose arrangements you can manage reliably.

12. Understand Australian Tax and Recordkeeping

Portfolio changes can have tax consequences even when money is not withdrawn to a bank account.

For investors holding crypto on capital account, selling or swapping one crypto asset for another can trigger a capital gains tax event. Different treatment may apply where activities constitute a business or trading operation. The ATO provides guidance on crypto investments and crypto-to-crypto exchanges.

Keep records of:

• Transaction dates.
• Assets and quantities involved.
• Australian-dollar values at the relevant times.
• Purchase and disposal costs.
• Transaction fees.
• Exchange statements.
• Wallet addresses and transaction identifiers.
• Transfers between your own wallets.

The ATO states that records of crypto assets and transactions are needed to work out capital gains or losses. Consult a registered tax agent when your circumstances or transactions are complex.