• Crypto assets explained, including bitcoin, ethereum and token types
• Market structure overview and major crypto categories
• Investing approaches with stocks and ETFs, and portfolio allocation considerations

Cryptocurrencies, including bitcoin and other digital money, have emerged as an alternative asset class worth $3.15 trillion. Given this rapid development, interested investors can approach cryptocurrencies with the goal of maximizing risk-adjusted returns and incorporating hedging strategies.

What Are Crypto Assets?

This question might seem self-explanatory, but cryptocurrency (crypto) assets have a very precise definition. It’s important to understand what makes bitcoin and other cryptocurrencies unique in order to grasp their intrinsic value.

Bitcoin is a decentralized cryptocurrency worth $1.8 trillion. It is stored on a digital ledger called a blockchain. Bitcoin is decentralized because no single individual or company owns or issues new coins, as compared to airline miles or rewards points from your favorite store.

If Congress, the U.S. Securities and Exchange Commission (SEC) or the U.S. Department of the Treasury wanted to contact bitcoin, there is no number to call or door to knock on. It does not and cannot have a CEO. In fact, bitcoin has a pseudonymous founder named Satoshi Nakamoto, but nobody knows who the person (or group) is, and they have not been involved in bitcoin development for many years.

Bitcoin fits the “crypto” part of this definition because it relies on the novel use of encryption algorithms to keep the network secure, process transactions and help participants authenticate themselves on the network.

I am frequently asked where bitcoin gets its value. After all, it is not backed by anything. One of my common retorts is that the U.S. dollar, which has been off the gold standard for over 50 years, is not backed by anything either. It is simply backed by the “full faith and credit” of the U.S. government.

Where does bitcoin get its intrinsic value? It comes from a few places. It was initially designed as a payment system, but it has settled into the narrative of being a form of digital gold.

Why does this analogy fit? First, bitcoin has a hard limit of 21 million units, which makes it a scarce asset. Second, its digital nature makes it far more transportable and divisible than gold. Finally, the network is highly secure. In the 15+ years of its existence, it has never been hacked. In fact, it has become so trustworthy that it is now promoted by trillion-dollar asset managers like BlackRock and Fidelity Investments.

Beyond Bitcoin, What Else Is Out There?

Bitcoin is the original blockchain and crypto asset as well as the center of the crypto universe, but it is hardly alone. An entire galaxy of crypto assets has been created to support a wide range of use cases and applications focused on vertical markets such as identity management, data storage, gaming, banking, lending, social media and prediction markets.

Because bitcoin started the industry, virtually every other crypto asset is called an altcoin. Altcoins can be categorized in a few different ways.

Protocol Tokens

Protocol tokens, also referred to as Layer 1 or base layer tokens, are native to a blockchain and are necessary for the operation of a given platform. Bitcoin is a protocol token, not only because it is what users send and receive over the network, but because it is also how miners (payment processors) are compensated for supplying their computer power.

Ethereum is by far the most prominent and popular altcoin. It has the second-largest market capitalization among cryptocurrencies ($370 billion) behind bitcoin ($1.8 trillion). It was created in 2015 by Vitalik Buterin, who was looking to build a blockchain platform that could run and execute any type of decentralized software program or application. Bitcoin is relatively rigid in its composition, which is by design, as more functionality offered by a blockchain can also create additional security vulnerabilities.

Many other prominent blockchains have their own protocol tokens. Some of the largest and most notable are solana, Base, BNB chain, tron, Polygon and Avalanche.

Layer 2 Tokens

Layer 2, or L2, tokens are an evolution of their Layer 1 predecessors. As Layer 1 blockchains have expanded in usage over the years, they have had to scale in order to handle demands on the network. In many cases, this means building compatible networks that sit on top of Layer 1 tokens like ethereum. Layer 2 tokens handle extra demand, batch transactions and secure data back onto the base layer blockchain. Layer 2 tokens are not able to fully operate on their own, but they have become sizable.

Some of the largest Layer 2 projects are Base, Arbitrum, Optimism and Mantle. However, an even bigger Layer 2 token may be coming soon, as Coinbase Global Inc. (COIN), the largest crypto exchange in the U.S., is expected to release a separate token in 2026 for its most popular Layer 2 blockchain, Base.

Application Tokens

If the base layer of a blockchain is the operating system, then decentralized applications (dapps) are the software programs that run on top of them. Many of these applications have their own tokens (known as dapp tokens) that are also freely traded on many exchanges. Dapp tokens first came to prominence in 2017 and 2018 during the initial coin offering (ICO) craze. It is worth noting that the vast majority of these ICO projects failed and the value of their assets went to zero. Both the failure and loss of value reflected the novelty, hyperbole and excitement of the space.

Nonetheless, dozens of dapp tokens still have market caps in the hundreds of millions, or even billions, of dollars today. These tokens underpin applications with real utility and actual business operations that make money.

The most notable among these are so-called decentralized finance (DeFi) tokens. Some of the most prominent include Aave, Uniswap, Ethena, Hyperliquid, SushiSwap, Curve, PancakeSwap and Sky. DeFi is an umbrella term used to capture traditional financial applications (such as banking or lending) that are replicated on a blockchain through dapps and smart contracts. Dapps and smart contracts are automatically executable pieces of code that activate when certain conditions are met. Think of smart contracts as if/then statements built into blockchains. Today, more than $120 billion is locked up in blockchain applications and DeFi tokens.

Memecoins and NFTs

Finally, it is important to highlight two recent developments in the crypto industry: memecoins and nonfungible tokens (NFTs). A core component of money, or crypto, is for every asset to be valued the same by every investor. They must be fungible. NFTs are the exact opposite of this. While they operate on top of blockchains just like any protocol or dapp token, each one of them has a set of unique properties or characteristics. The simplest version of an NFT with unique characteristics would be an NFT ticket to designated stadium seats. The ticket for Section F, Row 6, Seat 10 is different from the ticket for Section A, Row 9, Seat 22.

NFTs exploded in the early part of 2021, with everything from online video game assets to baseball cards and digital works of art being replicated on the blockchain via NFTs. The space has cooled down significantly but is still highly elevated from a historical perspective. The most well-known collections of NFTs are CryptoPunks and the Bored Ape Yacht Club.

Memecoins are assets that offer little in the way of utility, governance rights or passive income, but instead are traded for amusement (or “for the lulz,” as memecoin traders say). In fact, that is the selling point for most of these assets. A classic example of a memecoin is Dogecoin, built around the humorous online photo, or “meme,” of a Shiba Inu dog saying things like “much wow” in Comic Sans font. However, after becoming red hot in 2024, this craze has also died down.

Staking and Passive Income

For many investors, exposure to spot market prices has been risky and/or lucrative enough for their first forays into crypto assets. However, as the industry matures, methods are emerging for investors to earn passive income on their holdings. This strategy can help top up gains or hedge against price risk.

The two main strategies are staking and yield farming.

Staking

Staking is the act of posting certain crypto assets as collateral to participate in the operation of a blockchain. As compensation for locking up holdings, users receive regular rewards in a manner similar to interest payments. Staking is useful for blockchains that operate a proof-of-stake (POS) consensus mechanism, which is a way of securing the blockchain against attacks. This is a different approach than proof of work (POW), which is the computationally intensive and expensive mechanism employed by bitcoin, litecoin, bitcoin cash and many other tangents of the original blockchain.

Although POW has proven itself to be highly secure and effective, concerns are growing about its energy usage and associated carbon footprint. In addition, POW blockchains have scalability and throughput issues such that the bitcoin system can only process a handful of transactions per second, while POS platforms can handle hundreds of thousands of transactions per second.

Prominent stakeable assets include ethereum, solana, BNB chain and tron.

Please note that POS consensus mechanisms are not homogenous. Each blockchain network may use a different way of calculating staking rewards, taking into account various factors such as minimum staking requirements, lockup periods, payout schedules and reward amounts.

Yield Farming and Airdrops

Aside from purchasing tokens or receiving them as staking or mining rewards, it is also possible to earn them through engagement with various types of platforms. One of the first strategies for obtaining extra tokens is through a process known as yield farming.

Yield farming can be thought of as DeFi 2.0. Before, when you would provide liquidity to a decentralized exchange or lending protocol, you’d simply earn a fee or some interest. However, virtually every major DeFi platform now pays out rewards for participation in their governance tokens.

Airdrops occur when a protocol rewards early adopters with free tokens for being users. Often, they are necessary because a project may launch before its actual token, so the prospect of future remuneration is used to incentivize new users. In many cases, the amount of free tokens rewarded is proportional to the level of activity or amount of funds deposited in a certain project. Airdrops can happen at any time, and in many cases, a project will utilize multiple airdrops spaced months or years apart.

However, it is important to note that airdrops have been controversial in the past, as some users feel that they did not receive an appropriate amount of tokens. Plus, in many cases, sophisticated users might create multiple redundant accounts (known as a Sybil attack) to increase their allocation. Investors should also be on the lookout for rapid drops in price as well as usage of a platform and token after an airdrop.

Some of the biggest and most anticipated airdrops of all time are expected to occur next year with Coinbase’s Base token and the POLY token from the prediction market Polymarket.

Buying Crypto Without Holding It

Many investors want exposure to crypto but are uncomfortable with holding it themselves. Fortunately, your existing brokerage account likely offers many ways to get exposure to the asset class.

Exchange-Traded Funds

The crypto industry achieved a major milestone in January 2024 when the SEC approved the launch of spot exchange-traded funds (ETFs) in the U.S. These products are among the most successful launches of all time across any asset. Bitcoin ETFs alone hold more than $120 billion in assets. BlackRock’s iShares Bitcoin Trust ETF (IBIT) is the most profitable product for the entire company. However, ETFs now go far beyond bitcoin. It is possible to get exposure to single-asset products tracking altcoins like ethereum, solana and XRP. The SEC has also approved diversified ETFs that include a basket of the most valuable tokens.

Bitcoin Proxy Stocks

Some stocks have also become either proxies for bitcoin or ways to get directional exposure to the asset but with higher volatility. Business analytics firm Strategy Inc. (MSTR) is seen as a leader in the space, given its status as the largest corporate holder of bitcoin in the world. It has almost $60 billion worth of bitcoin on its balance sheet. For a long time, Strategy was on its own in this endeavor; however, 2025 has seen the rise of copycat digital asset treasury (DAT) companies focused on bitcoin and other prominent assets. Be careful, as the shine has rubbed off of many of these firms and several are now trading at large discounts to the value of their holdings.

Aside from DATs, many publicly traded bitcoin-mining firms—such as MARA Holdings Inc. (MARA), Riot Platforms Inc. (RIOT) and Cleanspark Inc. (CLSK)—can also be high-beta plays on the asset. These stocks have been big winners as of late because artificial intelligence (AI) firms are eyeing their computing hosting infrastructure as they seek to scale.

Some other crypto firms are also publicly traded. Coinbase was listed in April 2021, and stablecoin issuer Circle Internet Group Inc. (CRCL) went public in a wildly successful initial public offering (IPO) last spring. The year 2026 is expected to see another long list of companies going public, potentially headlined by crypto exchange Kraken and crypto wallet manufacturer Ledger.

Adding Crypto to a Portfolio

How do crypto assets fit into a portfolio?

The answer to this question really depends on an individual’s time horizon and risk tolerance. A good general rule of thumb is to begin with an allocation in the small single-digit percentages. It is worth noting that BlackRock started including digital assets in some of its model portfolios last year, with exposure to alternative assets. Just recently, BofA Securities and Merrill Lynch wealth advisers have been allowed to recommend up to a 4% allocation in cryptocurrency for clients.

Aside from questions about making investment decisions, I often receive questions about the specific mechanics of crypto investing. This is somewhat novel to the industry because traditional brokerage or wealth management accounts offer few options to buy crypto assets.

The U.S. alone has a wide variety of secure and regulated exchanges that offer simple onboarding procedures. Some of the biggest and most widely used include Coinbase, Kraken and Gemini Space Station Inc. (GEMI). They each have user-friendly websites and mobile applications.

Additionally, as the space has grown, many non–crypto-native platforms and financial applications such as Block Inc. (XYZ), Robinhood Markets Inc. (HOOD), Revolut and PayPal Holdings Inc. (PYPL) have enabled crypto trading. The added benefit of these platforms is that you do not need to do any additional onboarding if you are already a client.

Once you’ve bought cryptocurrency, you need to keep it safe. Virtually all of the regulated platforms recommended for first-time buyers will provide software wallets (similar to mobile banking applications) that are reasonably secure. The security of these applications can be further enhanced by taking a couple basic steps:

• Choosing a complex and unique password or passphrase, and
• Utilizing two-factor authentication as a second check when logging into your account.

Conclusion

The world of crypto is exciting and continues to evolve as it garners mainstream acceptance from governments, traditional financial institutions and investors around the world. For more insights on crypto, subscribe to Bits + Bips, a newsletter provided by AAII and Unchained that bridges the knowledge gap and provides objective, actionable insights. See below for more information. 

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