Is cryptocurrency a safe investment?

I'll put together a balanced view on crypto safety — checking current risks, volatility and expert guidance.

Generally, regulators and financial experts do not consider cryptocurrency a "safe" investment - it is considered highly risky and speculative.

Why it is considered high-risk

1. Extreme volatility
Cryptocurrency prices are extremely volatile and can rise or fall by 10–30% in a single day, making it one of the riskiest asset classes. Surveys show 84% agree cryptocurrency can have extreme volatility, causing investors to quickly lose their investment.

Schwab's research found that "Any allocation to cryptocurrency is likely to increase a portfolio's volatility," pointing to sharp historical swings.

Even Bitcoin, the world's most valuable cryptocurrency, endured 70%-80% peak-to-trough declines during the crypto crashes in 2017-2018 and 2021-2022.

The U.S. Securities and Exchange Commission's Office of Investor Education and Advocacy has cautioned investors against investments involving crypto asset securities citing its "exceptionally volatile and speculative" nature.

2. You can lose all of your investment
The European Supervisory Authorities (ESAs) warn that investors can "lose a large amount, or even all, of the money invested" and that virtual currencies are "highly risky and unregulated products and are unsuitable as investment, savings or retirement planning products".

Regulators in Thailand require exchanges to warn: "Please study and understand the risks of cryptocurrencies thoroughly, because you may lose the entire investment amount".

3. Lack of investor protections and regulation
Crypto exchanges "may lack important protections for investors". The SEC has noted that so far no crypto asset entity is registered as a national securities exchange, so investors may not benefit from rules that protect against fraud, manipulation, front-running and wash sales.

The SEC has also warned on crypto custody and security risks, emphasizing the importance of selecting reliable custodians and understanding private key storage.

Cryptocurrency is typically riskier than stocks - while both can fluctuate, crypto assets are far more volatile and vulnerable to scams or hacking, while stocks are regulated, backed by company performance and offer greater transparency and investor protection.

4. Scams, hacks and security risks
Top threats include volatility, scams, phishing and hacks via bridges/smart contracts. The SEC has stated that fraudsters tend to leverage innovative investment technologies in order to perpetuate investment scams.

Key security risks include smart contract vulnerabilities that enable fund theft, exchange hacks compromising stored assets, network attacks like 51% attacks, phishing scams targeting private keys, and wallet compromises.

5. Counterparty risk - you can lose access to your holdings
Cryptocurrencies are often marketed as "decentralized," but they're actually dependent on layers of centralized platforms, such as exchanges, custodians, lending platforms, and stablecoin issuers. If those platforms fail, you could be locked out of your crypto holdings.

That's what happened to investors who put tokens in FTX, BlockFi, and Celsius Network, which all collapsed because they diverted customers' funds into other risky investments.

Is there any upside?

Investors are attracted to crypto because of the potential for substantial profits in a relatively short period and possibilities for diversification beyond traditional products. However, most financial advisors frame it as a high-risk, high-reward speculative asset - not a safe store of value - and suggest any strategy should be about how much pain you can handle, not just how much money you will make.

If you do choose to invest, experts commonly suggest to reduce risk:

•Only invest what you can afford to lose completely

•Keep allocation small - e.g., 1-5% of a diversified portfolio

•Use dollar-cost averaging rather than lump-sum timing

•Use reputable, regulated exchanges that segregate customer assets

•Move long-term holdings to a hardware wallet and spread assets across multiple platforms, and avoid high-yield staking products that sound too good to be true

•Be extremely cautious of phishing, fake exchanges, pump-and-dump schemes and "guaranteed return" offers

•Understand you have no FDIC/SIPC-like protection and proof-of-reserves is not as rigorous as an audited financial statement

In short: cryptocurrency is not considered a safe investment in the same way as savings accounts, bonds, or diversified stock index funds. It is best viewed as a speculative asset with a risk of total loss.

This is not financial advice. Consider speaking with a licensed financial advisor about your risk tolerance and goals before investing.

Citations (2)

1cryptopotato.comNot yet classified
SEC Issues Warning Against Investing in Crypto Asset Securities
Backs: “Even Bitcoin, the world's most valuable cryptocurrency, endured 70%-80% peak-to-trough declines during the crypto crashes in 2017-2018 and 2021-2022. The U.S. Securities and Exchange Commission's Office of Investor Education and Advocacy has cautioned investors against investments involving crypto asset securities…”
2fool.comCommercial contentquality 0.84
The Biggest Risk in Crypto That Most Investors Completely Ignore
Backs: “Cryptocurrencies are often marketed as "decentralized," but they're actually dependent on layers of centralized platforms, such as exchanges, custodians, lending platforms, and stablecoin issuers.”