Cryptocurrencies such as Bitcoin and Ether have made some early buyers rich and wiped out many others. Before putting money in, it helps to understand the specific risks, many of which do not exist with stocks or bonds.
1. Extreme volatility
Bitcoin has fallen by 70% or more several times, including in 2018 and 2022, and smaller coins have often dropped 90% or disappeared. Price swings of 10% in a day are not unusual. If a 75% drop would force you to sell or lose sleep, your position is too large.
2. No underlying cash flows
A stock represents a share of company profits; a bond pays interest. Most cryptocurrencies produce no income, so their price depends on what the next buyer will pay. That makes valuation hard and sentiment-driven.
3. Platform and custody risk
- Exchange failures: FTX collapsed in 2022, freezing billions in customer funds. Celsius and Voyager also went bankrupt.
- No SIPC or FDIC coverage for crypto holdings, even at well-known apps.
- Self-custody risk: if you hold your own keys and lose the recovery phrase, the funds are gone for good. Hardware wallets reduce online hacking risk, but only if you protect the recovery phrase.
4. Scams and fraud
Crypto is the payment method of choice in many investment frauds: fake trading platforms, “pig butchering” romance scams, pump-and-dump tokens, fake celebrity giveaways. The FBI’s Internet Crime Complaint Center has reported billions of dollars a year in crypto investment fraud losses. More in how to protect yourself from investment scams.
5. Regulation and taxes
Rules keep changing, and some tokens may be treated as securities. In the US, crypto is taxed as property: selling, swapping one coin for another or spending it can trigger capital gains (how capital gains are taxed). Brokers now report many crypto transactions to the IRS.
6. Technical risks
Smart-contract bugs, bridge hacks and “stablecoins” that lost their peg (TerraUSD in 2022) have caused large losses.
If you still want exposure
- Treat it as speculation, with money you can afford to lose. Many advisors who allow it suggest a small single-digit percentage at most.
- Prefer the largest, most established assets over new tokens.
- Spot Bitcoin and Ether ETFs, approved in 2024, let you hold exposure in a regular brokerage account, with fund-level custody and ordinary statements, though prices are just as volatile.
- Never use leverage, and never invest because someone contacted you.
The SEC’s Investor.gov spotlight on crypto assets and the CFTC’s customer advisories cover the warning signs.
