I Made A Small Fortune On Bitcoin. What Should I Do To Diversify My Portfolio?

You took the leap, rode the Bitcoin wave and now you’re sitting on a small fortune. Whether you bought in early or timed a recent bull run just right, congratulations. But now comes the tricky part — figuring out what to do next.

As any seasoned investor will tell you, keeping your wealth is just as important as making it. Now that you’ve struck it big with digital gold, what’s the best way to spread your wealth across different investments?

Here’s how to build a diversified portfolio that balances growth, security and future buying opportunities.

First, understand the tax consequences 

Diversification is an admirable goal, but if Bitcoin is your only asset, the reality is you’ll need to sell some of that cryptocurrency in order to purchase other assets and diversify your portfolio. 

But cashing out Bitcoin that’s appreciated in value, like selling any appreciated asset, will almost certainly trigger a taxable event, says Matt McClintock, founder of The Bespoke Group, a strategic wealth firm.

“If they’re in a short-term gain position, they’re going to recognize short-term capital gains tax, which will be taxed at the ordinary income rate,” says McClintock. “And that could push them into a high tax bracket, giving them a higher income tax liability. So they need to be prepared for that.”

The IRS generally provides lower tax rates for long-term capital gains (investments held for at least one year) compared to short-term gains (investments held less than one year). Since short-term gains are taxed as ordinary income, rates range from 10 percent to 37 percent in 2024 and 2025. In contrast, long-term capital gains are taxed at 0 percent, 15 percent or 20 percent in 2024 and 2025 — with most taxpayers falling into the 15 percent bracket.

Having your target cash amount in mind is also important as you sell your Bitcoin, says McClintock, who has been managing complex cryptocurrency planning strategies for clients since 2018. Doing so can help you estimate the tax bill waiting for you on the other side.

Another strategy is using a crypto-specific tax accounting application like Node 40. This tool lets users track their Bitcoin holdings by tax lots, allowing them to strategically choose which assets to sell.

“So instead of saying, ‘I’m just going to sell $200,000 worth of Bitcoin,’ they could very strategically choose which lots of Bitcoin to sell,” says McClintock. “This way, they can get to their net cash amount but do it in a way that either minimizes the capital gains tax liability, or potentially even generates a deductible loss if they have newer high-basis Bitcoin lots.”

If you plan to sell a portion of your Bitcoin, working with a tax professional is a smart move. They can save you money by potentially offsetting some of your tax burden and ensuring you report your sales correctly to the IRS.

How to diversify your portfolio

Something to keep in mind as you diversify your portfolio is that diversification looks different for everyone. How you allocate assets depends largely on your age, time horizon, financial goals and your appetite for risk.

“If this is a very young adult, they’re not married and they don’t have dependents they need economic stability for — they may be well suited to just continue holding Bitcoin, assuming they have a strong risk tolerance and don’t have a need for additional cash flow,” says McClintock.   

Meanwhile, people in their 40s or 50s will likely have a lower appetite for volatility and risk, so they’ll likely want to sell a larger position of their Bitcoin, says McClintock.  

In short, diversifying your portfolio is nuanced and highly dependent on your specific situation. 

Speaking with a financial advisor can help you design a diversification strategy and asset allocation tailored to your unique needs. They can take a holistic look at your finances and create a plan to help you achieve your goals. 

But keep in mind that not all financial advisors are well-versed in advising clients with large cryptocurrency holdings, so make sure to ask any potential advisor how comfortable they are working with a client in your specific situation. 

With that being said, here are some general best practices to diversify your portfolio, according to financial experts. 

Index funds

Index funds are a good starting point when it comes to diversifying a portfolio. 

“A mix of low-cost index funds, ETFs or diversified mutual funds can provide stability and long-term growth while balancing out crypto’s high risk,” says Daniel Milks, a certified financial planner and founder of Woodmark Wealth Management. 

An index fund tracks major stock market indexes, such as the S&P 500, and they’ve historically delivered strong long-term returns, averaging about 10 percent annually over time. Unlike picking individual stocks, buying index funds helps you diversify your portfolio across multiple companies. 

Index funds also come with lower fees than actively managed funds, making them a great option for investors looking for steady, long-term growth without constant hands-on management. 

Bond funds and dividend stock funds

After the roller coaster ride of crypto, you might want some steady, predictable income. That’s where bonds and dividend stocks come in.

Bonds are essentially loans to governments or corporations that pay you interest over time, and they’re considered less volatile than stocks or crypto. The downside? Returns are lower, typically 3 percent to 5 percent annually. Bonds are generally considered a way to preserve wealth, and a tool to balance out the high risk of stocks and cryptocurrency. 

Like purchasing an index fund, buying a bond fund can help you diversify your portfolio across different bonds with varying maturities — at a lower cost than you’d typically find if you purchase individual bonds. 

Another option is dividend stocks. Certain stocks pay dividends — regular cash payouts to shareholders. Some of the best-performing dividend stocks belong to well-established companies like Coca-Cola, Johnson & Johnson and Procter & Gamble.

Dividend stocks and dividend funds help provide consistent passive income along with the potential for stock appreciation. By reinvesting these dividends, you can further accelerate your portfolio’s growth over time.

Exploring safer investments like bonds becomes especially important for older investors approaching retirement, says McClintock. 

“If they need income and stability, I would think about reinvesting in something as ordinary as a well-performing, triple-exempt municipal bond portfolio,” he says. “This way, they can turn a capital asset like Bitcoin into a tax-efficient, income-producing asset.”

Real estate

Real estate is another way investors can diversify their portfolios. Many young investors view real estate as a great way to build long-term wealth, especially if they can rent out the property. 

While there’s truth to this, real estate is a surprisingly risky investment. It may not experience dramatic highs and lows like cryptocurrency, but its illiquid nature, upfront costs, property taxes and ongoing maintenance can make investing in real estate less profitable than you might imagine, especially in the beginning. 

It’s important to weigh the pros and cons of investing in real estate carefully and set realistic expectations for your potential returns. And if your goal is passive income, be mindful of risks like market fluctuations, vacancies, property management costs and difficult tenants.

For those planning to stay in one place long term, buying a home to live in can make sense since it locks in a stable monthly payment that may be comparable to rent. Plus, you could benefit from potential tax deductions on mortgage interest. However, buying a home requires time and management, so make sure it aligns with your financial goals and lifestyle first. 

For those who want exposure to real estate without the hassle of property management, real estate investment trusts (REITs) offer an alternative. REITs allow investors to earn income from real estate without directly owning property — and they often provide high dividend payouts along the way.

Conservative investments for short-term goals

Maybe you’d like to buy a house next year, pay for a wedding or buy a new car. Or maybe you’re a few years away from retirement and want to set aside a little extra cash in case of a market downturn. 

If you need to tap your net worth in the next year or two to finance a major purchase, experts recommend keeping this money in low-risk investments and accounts. 

Financial experts also recommend keeping three to six months of expenses in a cash emergency fund. This helps you weather financial shocks, such as losing your job or covering unexpected car repairs. 

High-yield savings accounts and certificates of deposit (CDs) offer a safe place to park cash while earning modest interest. Treasury bonds and I bonds, backed by the U.S. government, are also options if you’re seeking stability. 

Should you diversify with other cryptocurrencies?

Since Bitcoin has been your primary wealth generator, you might wonder if it makes sense to diversify with other cryptocurrencies. 

Some investors choose to spread their holdings across other digital assets. These altcoins offer unique use cases, such as smart contracts and decentralized applications, and might offer significant potential growth over time. 

However, many alternative cryptocurrencies are highly volatile — even more volatile than Bitcoin. Many have collapsed after the initial hype fades away. 

While there’s no such thing as a safe cryptocurrency investment, Bitcoin, Ethereum and Solana are considered more stable options. As the oldest cryptocurrency, Bitcoin still dominates investor interest and market cap, despite the emergence of thousands of other coins. 

As a market leader, Bitcoin offers a stronger track record and is more likely to endure long-term. So unless you deeply understand other cryptocurrency projects, it might be best to keep the majority of your crypto holdings in Bitcoin.

Gradually dialing back your Bitcoin exposure 

Many financial experts recommend slowly reducing your Bitcoin holdings over time instead of opting for a drastic downsizing.

Why? Namely, taxes. Spreading your sales over several tax years can prevent you from moving into a higher tax bracket, which can help you pay less on short-term capital gains and keep your overall taxable income lower. 

“Consider creating a systematic sell plan,” says Nick Rygiel, a certified financial planner and owner of Ironclad Financial. “Reduce Bitcoin holdings over time by selling a fixed percentage.”

If your goal is to reduce your overall exposure to Bitcoin — but not necessarily reinvest the money elsewhere — Rygiel has another suggestion. 

“Gift it away,” he says. “Either to a charity that accepts BTC donations or to family members up to the annual gift tax exclusion.”

Trent Porter, a certified financial planner and certified public accountant at Priority Financial Partners, offers another option. 

“If you’re charitably inclined, establishing a donor-advised fund can help offset a potentially large tax bill,” he says. 

A donor-advised fund (DAF) is a charitable giving account that lets you contribute funds, take an immediate tax deduction and distribute grants over time. These funds are affordable to set up and can be invested to grow while you decide which charities to support.

To establish a DAF, you’d contribute to a sponsoring organization like Schwab Charitable or Fidelity Charitable. While you can recommend how funds are distributed, once assets are contributed, the money can’t be withdrawn for personal use.

Slowly reducing your exposure isn’t all about taxes, though. There’s also a psychological adjustment to consider. 

“Most other investments you choose will likely feel boring with underwhelming return profiles,” says Tim Witham, a certified financial planner and founder of Balanced Life Planning. 

He says the key to getting past this mindset is becoming laser focused on your goals and “giving your money a job,” such as saving for a down payment, building an emergency fund or preparing for retirement. 

“Use separate accounts for your goals to make this easier,” says Witham. 

A final option is committing a percentage of your current salary to the investments discussed earlier while retaining a majority of your Bitcoin holdings. It will take years to diversify your portfolio this way, but if you’re earning a high salary, this approach can help you avoid the worst tax implications of off-loading thousands of dollars worth of Bitcoin. 

Keep your remaining Bitcoin safe

If you’re a true Bitcoin believer, you’ll want to hold onto some of your Bitcoin. But keeping it safe should be a top priority. After all, leaving gobs of Bitcoin on an exchange is risky since multiple platforms have been hacked or have frozen customer withdrawals over the years. 

The best way to secure your holdings is by using a cold wallet, such as a Ledger or Trezor hardware wallet, which stores your cryptocurrency offline, making it nearly impossible for hackers to access. Multi-signature wallets add another layer of security by requiring multiple approvals before transactions are executed. 

You’ll likely want to keep a small portion of your holdings on a cryptocurrency exchange for easy access when buying opportunities arise. To keep those assets safe, enable two-factor authentication on your accounts and use strong, unique passwords.

Bottom line 

Bitcoin made you a fortune, but keeping that wealth requires smart moves, such as working with a financial advisor. Diversifying your portfolio with index funds, bonds, dividend stocks or real estate can balance risk and protect your gains. Selling Bitcoin gradually can help you manage taxes, and securing your remaining holdings in a cold wallet ensures long-term safety. Whether you reinvest or cash out, having a clear strategy can help turn your Bitcoin windfall into lasting wealth. 

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.