Is cryptocurrency a safe investment?

NoSays it is contested

Crypto safety is a fast-moving question — I'll gather current data on its risks and volatility to give you a balanced answer.

In general, cryptocurrency is not considered a safe investment in the traditional sense - it is considered a high-risk, speculative asset.

Whether it is appropriate for you depends on your risk tolerance and your investment goals, and deciding whether cryptocurrency is a good investment depends on your circumstances and risk tolerance.

Why it is considered high-risk

1. Extreme volatility
Cryptocurrency is deemed a high-risk asset and prone to sharp price movementsand like all cryptocurrencies, is volatile and carries investment risks.

•Volatility is often considered the biggest risk in investing in cryptocurrencies. 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.

•Cryptocurrency values can fluctuate dramatically within minutes or hours. The price of coins can fluctuate by 20% to 50% in just a few days.

•From 2020 to 2024, Bitcoin's annualized volatility averaged 83%, dwarfing the S&P 500's 16% and Treasury bonds' 5%.

Because of this, cryptocurrency is a risk-on investment. There are countless examples of investors losing it all by investing in crypto. Many coins have no intrinsic value and will almost certainly go to zero someday.

For mainstream investors, especially those nearing retirement, the risks associated with crypto — its extreme volatility, regulatory uncertainty, and growing correlation with traditional markets — make it an unsuitable addition to long-term savings vehicles like 401(k)s.

2. No government insurance or protection
Cryptocurrency and other digital assets are NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE.

•Stablecoins and digital asset exchange platforms are NOT federally insured. The Federal Deposit Insurance Corp. (FDIC) and National Credit Union Administration (NCUA) only protect bank or credit union depositors. The Securities Investor Protection Corp. (SIPC) protects investor assets if a financially troubled member firm fails. No insurance will protect you against market losses.

•According to the regulator, the lack of protections equivalent to those provided by the Securities Investor Protection Corporation (SIPC) and the Federal Deposit Insurance Corporation (FDIC) in the crypto asset sector remains a critical issue.

That means if an exchange fails or your coins lose value, there is no federal safety net to recover funds, unlike cash in an FDIC-insured bank.

3. Regulatory and legal uncertainty
Cryptocurrency is not fully regulated by governments or other financial authorities. The digital asset marketplace is largely unregulated and fraud is a significant risk.

4. Cybersecurity and counterparty risks

•Hackers target exchanges and online wallets for fraudulent purposes. If your cryptocurrency is stolen during a hack or scheme, there is usually nothing you can do to get it back.

•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 their tokens in FTX, BlockFi, and Celsius Network. These platforms all collapsed because they diverted their customers' funds into other risky investments.

5. Fraud and scams
The SEC has warned about fraudsters leveraging innovative investment technologies to perpetuate investment scams, highlighting the "devastating losses" faced by retail investors due to scams.

Common red flags identified by the Commodity Futures Trading Commission (CFTC) include:

•Digital asset trading can be highly volatile, and there is no such thing as a guaranteed or risk-free investment. If a site promises to multiply your money in a matter of days or weeks, it is a fraud.

•Most digital asset scams begin on social media or through messaging apps.

Can it ever be part of a portfolio?

Some analysts note cryptocurrency can be a profitable long-term investment, but it is not without significant risks. For conservative investors, cryptocurrency may represent a small portion of a diversified portfolio. It can be considered only when approached with caution, proper research, and a well-balanced strategy.

It is generally not recommended to invest money you cannot afford to lose, or to allocate a large percentage of retirement savings to crypto.

If you do choose to invest, ways to reduce risk

This is not financial advice, but common risk-management practices cited by regulators and analysts include:

•Research any cryptocurrency before investing objectively.

•Put coins in hardware wallets, spread assets across multiple platforms, and avoid high-yield staking products that sound too good to be true.

•Only work with investment platforms and advisers that are registered to do business in the United States or in your individual state.

•Be skeptical of guaranteed returns, loan offers or matching funds, and claims that customer assets are federally insured.

•Understand that digital asset transactions cannot be reversed and typically cannot be recovered once transferred.

Before investing, consider speaking with a licensed financial advisor who can assess your goals, time horizon, and risk tolerance.

This information is for educational purposes only and does not constitute investment advice.

Citations (2)

1fool.comCommercial contentquality 0.84
The Biggest Risk in Crypto That Most Investors Completely Ignore
Backs: “Cryptocurrency is deemed a high-risk asset and prone to sharp price movementsand like all cryptocurrencies, is volatile and carries investment risks.”
evidence, article, points to no. Claim: Cryptocurrency is a high-risk asset prone to sharp price movements and volatility, carrying investment risks.
2cftc.govGovernment
Curious About Crypto? Watch Out for Red Flags
Backs: “No government insurance or protection. Cryptocurrency and other digital assets are NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE.”
evidence, official document, points to no. Claim: Crypto and digital assets are not FDIC insured, not bank guaranteed, and may lose value; no risk-free or guaranteed investment exists.