Is cryptocurrency a safe investment?

Is crypto safe? I'll review current market risks, volatility, and investor guidance to give you a balanced answer.

Cryptocurrency is generally not considered a safe investment compared to more traditional investments like stocks or bonds, and is considered highly speculative. It is not inherently a scam, but it carries significant risks.

This is not financial advice, but here are the main risks experts and regulators point to:

1. Extreme Volatility

> A cryptocurrency's value can change constantly and dramatically. An investment that may be worth thousands of dollars on Tuesday could be worth only hundreds on Wednesday. If the value goes down, there's no guarantee it will rise again.

Major financial institutions warn that:

•Buying, selling, and transacting in Bitcoin, Ethereum or other digital assets is highly speculative and may result in a loss of the entire investment

•Digital Assets have only been in existence for a short period of time and historical trading prices for Digital Assets have been highly volatile. The price of Digital Assets could decline rapidly, and investors could lose their entire investment

•The exchange rate of certain Digital Assets versus the USD has in the past dropped more than 50% in a single day

For example:

•Bitcoin hit an all-time of more than $63,000 per coin on April 15, 2021, before falling by nearly 45% to a level of around $35,000 just over a month later

•Even Bitcoin endured 70%-80% peak-to-trough declines during the crypto crashes in 2017-2018 and 2021-2022

Because correlations between cryptocurrencies like Bitcoin and traditional assets like stocks and bonds are incredibly unstable, it is not clear whether Bitcoin is a risky or defensive asset.

2. Not Backed or Insured

•Cryptocurrencies aren't backed by a government or central bank. Unlike most traditional currencies, such as the dollar or yen, the value of a cryptocurrency is not tied to promises by a government or a central bank.

•If you store your cryptocurrency online, you don't have the same protections as a bank account. Holdings in online "wallets" are not insured by the government like U.S. bank deposits are.

•Unlike US banks and credit unions that provide certain guarantees of safety to depositors, there are no such safeguards provided to Digital Assets held in digital wallets by their providers or by regulators.

As one consumer expert noted, cryptocurrencies are very risky investments because the technology is new and unproven.

3. Regulatory and Legal Uncertainty

•The value of Digital Assets may be negatively impacted by future legal and regulatory developments

•Many promoters of initial coin offerings (ICOs) and other cryptocurrency investments are not following federal and state securities laws

•The SEC has reissued warnings about FOMO crypto investing and the risks associated with digital assets, including meme stocks, cryptocurrencies and NFTs

The SEC has warned that crypto asset securities may not be complying with U.S. laws and urged investors to be vigilant.

4. Security, Hacking, and Theft Risks

•Platforms that buy and sell Digital Assets can be hacked, and some have failed. In addition, like the platforms themselves, digital wallets can be hacked, and are subject to theft and fraud

•Over the past several years, certain Digital Asset exchanges have experienced failures or interruptions in service due to fraud, security breaches, operational problems or business failure

•There is a risk that some or all of a product's Digital Asset could be permanently lost, stolen, destroyed or inaccessible by virtue of, among other things, the loss or theft of the "private keys"

And:

> Nothing about cryptocurrencies makes them a foolproof investment. Just like with any investment opportunity, there are no guarantees.
> No one can guarantee you'll make money off your investment. Anyone who promises you a guaranteed return or profit is likely scamming you.

5. High Rate of Scams and Fraud

Cryptocurrency is a common target for scams due to its hype and anonymity.

•Since 2021, $575 million of all crypto fraud losses reported to the FTC were about bogus investment opportunities

•Fraud reports suggest most of the cryptocurrency losses consumers reported involved bogus cryptocurrency investment opportunities, which totaled $575 million in reported losses since January 2021

•In total, consumers reported losing more than $1 billion in cryptocurrency to scams since 2021, with crypto investment scams the most common type

Scams often involve false promises of huge returns, fake investment platforms, and social media recruitment.

If You Are Considering Investing

Most financial advisors recommend treating crypto, if at all, as a small, high-risk portion of a diversified portfolio and only investing money you can afford to lose completely.

Common risk-reduction steps if you decide to invest:

•Do extensive research on the specific coin/token and the team behind it - Not all cryptocurrencies or the companies behind them are the same

•Use reputable, regulated exchanges and consider cold storage (offline wallets) for larger holdings

•Enable two-factor authentication, use strong unique passwords, and protect your private keys

•Beware of guaranteed returns, celebrity endorsements without disclosure, and pressure to act quickly

•Understand tax implications and lack of liquidity - you may not be able to withdraw when you want

Bottom line: While some investors are attracted to crypto for its potential high returns, innovation, and decentralization, regulators like the FTC and SEC and major financial institutions consistently describe it as highly volatile, speculative, and lacking traditional consumer protections. For most investors, especially those needing stability or near-term access to funds, it is not considered safe.

If you are thinking about investing, consider speaking with a qualified, fiduciary financial advisor who can assess your risk tolerance, time horizon, and goals.

Would you like guidance on how to evaluate a specific cryptocurrency or how to spot common crypto scams?

Citations (2)

1ftc.govGovernment
Know the risks before investing in cryptocurrencies
Backs: “A cryptocurrency's value can change constantly and dramatically. An investment that may be worth thousands of dollars on Tuesday could be worth only hundreds on Wednesday.”
evidence, article, points to no. Claim: A cryptocurrency's value can change constantly and dramatically, with no guarantee of recovery after a drop in value.
2morganstanley.comCompanies
Understanding Cryptocurrency Investment Risks | Morgan Stanley
Backs: “An investment that may be worth thousands of dollars on Tuesday could be worth only hundreds on Wednesday. If the value goes down, there's no guarantee it will rise again. Major financial institutions warn that: Buying, selling, and transacting in Bitcoin, Ethereum or other digital assets is highly speculative and may…”
attribution, article, points to no. Claim: Major financial institutions warn that transacting in Bitcoin, Ethereum or other digital assets is highly speculative and may result in loss of the entire investment.