Bitcoin and cryptocurrencies for beginners: what you need to know before investing a single euro

A cryptocurrency is a digital asset that operates on a decentralised network called a blockchain. Unlike traditional money, it is not issued or controlled by any central bank or government. Transactions are recorded in cryptographically linked blocks, making them virtually impossible to forge or modify retroactively. Bitcoin, created in 2009, was the first and remains the largest by market capitalisation. Today there are thousands of cryptocurrencies with very different purposes and technologies.

Ethereum, the second most important, allows smart contracts to be programmed that execute agreements automatically. This gave rise to the entire ecosystem of decentralised finance (DeFi), NFTs and blockchain applications.

Bitcoin is the most volatile asset in conventional financial markets. It has experienced 80-85% drops from peaks in 2011, 2013-2015, 2017-2018 and 2021-2022. Those who bought at the 2021 peak (near $69,000) had to wait until 2024 to recover that price. Many smaller-cap cryptocurrencies have never recovered from their falls or have simply disappeared.

Beyond market volatility, there are additional risks: exchange hacks (Mt. Gox, FTX), fraudulent projects (rug pulls), loss of private keys with no recovery possibility, and regulatory risk (bans or restrictions in various countries).

The Tax Agency treats cryptocurrencies as assets for income tax purposes. Each sale or exchange of cryptocurrencies generates a taxable event. The gain or loss is calculated as the difference between the selling price and the acquisition cost (FIFO: first in, first out). That gain is taxed in the savings base: 19% up to €6,000, 21% from €6,000 to €50,000, 23% from €50,000 to €200,000, 27% from €200,000 to €300,000, and 28% above that.

Important: exchanging one cryptocurrency for another (for example, Bitcoin for Ethereum) is also a taxable event in Spain, even if you have not converted to euros. Many investors are unaware of this and unknowingly accumulate tax debts.

Since January 2024, Spain requires the declaration of cryptocurrency balances held in foreign exchanges (Binance, Coinbase, Kraken, etc.) if the total value exceeds €50,000 at 31 December. This is done via form 721, similar to form 720 for foreign bank accounts. Non-compliance can result in significant penalties. If your cryptos are in your own wallet (hardware wallet), there is currently no specific declaration requirement.

There is no universal answer, but most independent financial advisors who accept cryptocurrencies as an asset place the reasonable maximum allocation between 1% and 5% of the total portfolio, for medium-to-high risk tolerance profiles. For conservative profiles or those with short investment horizons, the recommendation is usually zero. The logic is simple: if that percentage goes to zero, the impact on your net worth is manageable. If it multiplies by ten, the benefit is significant but does not radically change your situation.

Before investing in cryptocurrencies, make sure you have: a solid emergency fund (3-6 months of expenses), high-interest debts paid off, and a diversified investment portfolio as a base (index funds, for example). Cryptocurrencies are the last rung, not the first.