Is cryptocurrency a safe investment?

Is crypto a safe bet? I'll pull the latest data on volatility and risks to give you a balanced answer.

Cryptocurrency is generally not considered a safe investment in the traditional sense. Most financial regulators and consumer protection agencies classify it as a high-risk, speculative asset, though risk level depends on how much you invest, which asset you choose, and your risk tolerance.

This is general information, not personal financial advice.

1. Why it is considered high-risk

a) Extreme volatility
Cryptocurrency prices can be extremely volatile.

Volatility has declined somewhat in recent years - Grayscale research shows Bitcoin's volatility falling to 43% from 81% five years ago, with one-year realized volatility at 43%- but it remains far higher than most traditional investments like bonds or broad stock indexes. 53% of crypto investors themselves considered it a high-risk venture.

> No cryptocurrency investment is completely safe. You should always exercise caution when investing in Bitcoin and any other cryptocurrency by only making it a small portion of your portfolio

b) Regulatory warnings: You can lose all your money

The European Supervisory Authorities (ESAs), made up of ESMA, EBA and EIOPA, warn that:

> The ESAs warn consumers that VCs (virtual currencies) are highly risky and unregulated products and are unsuitable as investment, savings or retirement planning products

The high risk means that investors can “lose a large amount, or even all, of the money invested:”

Their advice to consumers is:

> “You should not invest money you cannot afford to lose.”

The ESAs also noted cryptocurrencies show "clear signs of a pricing bubble"and warned customers that cryptocurrencies are “highly risky” assets.

In the UK, a Treasury Committee report said it was concerned that regulating retail trading in unbacked cryptoassets as a financial service will create a ‘halo’ effect that leads consumers to believe that this activity is safer than it is, and recommended regulating it as gambling rather than as a financial service.

In the US, the FTC, SEC and CFTC warn consumers to be skeptical because only scammers guarantee profits and the FTC says only scammers guarantee profits or big returns.

c) Lack of protection, scams, hacks and fraud

Unlike bank deposits or regulated securities, crypto has minimal recourse if something goes wrong:

Scale of losses is large:

Common 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. Audit badges can also give investors a false sense of security because reviews often omit wallets and systems attackers actually target.

Other risks include market manipulation by a small number of insiders, use for illicit activity, liquidity risk, and rapid regulatory changes.

2. Is there any upside?

Supporters point to potential rewards:

However, even supporters frame it as a question of "how much pain you can handle, not how much money you'll make" because allocation to cryptocurrency is likely to increase volatility, and investors should be prepared to hold through volatility and market downturns.

3. If you are considering investing, how to reduce risk

Regulators and consumer agencies suggest these precautions:

Bottom line

Cryptocurrency is not safe in the way that insured savings accounts, government bonds, or diversified index funds are considered safe. It is highly volatile, largely unregulated, irreversible, and vulnerable to scams and hacks where you can lose a large amount or all of the money invested.

For risk-tolerant investors with a long time horizon, extensive research, and who limit exposure to a small percentage of net worth, some advisors view it as a speculative addition to a portfolio. For conservative investors, those needing stable savings, or those uncomfortable with 30%+ swings or 70-80% drawdowns, it is generally deemed unsuitable.

If you are unsure, consider speaking to a licensed, fiduciary financial advisor who does not have a stake in selling crypto products.

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