Block data
- The FTC says a crypto investment worth thousands of dollars today might be worth only hundreds tomorrow, with no guarantee it will recover.
- The SEC warns that investors who deposit crypto with a platform might cease to have legal ownership of those assets and might not get them back.
- Leverage amplifies the underlying risk of futures trading, according to the CFTC.
Volatility is the word most people use for crypto risk, and it is real. But when regulators list the ways people lose money, price swings are only the first item. This guide goes through the rest, using the agencies’ own words where possible. It is not investment advice, and it does not predict where any price is going.
Price risk
The FTC puts it plainly: the value of a cryptocurrency can change rapidly, even by the hour, and the change can be significant. Crypto tends to be more volatile than traditional investments such as stocks and bonds. An investment worth thousands of dollars today might be worth only hundreds tomorrow, and if the value goes down, there is no guarantee it will go up again. The CFTC adds flash crashes to the list of cash market risks.
Volatility also works on your nerves. The SEC’s advice is to know your risk tolerance and time horizon before buying, because the right answer depends on when you will need the money and whether you can live with losing your entire principal.
The SEC’s investor alert describes crypto asset securities as potentially exceptionally volatile and speculative, and lists illiquidity alongside volatility. It also warns that the market for a particular crypto asset may disappear altogether, or the asset may stop being tradable anywhere.
Platform risk
The risk beginners most often miss is the platform itself. The SEC warns of the potential for the company holding your crypto assets to fail or go bankrupt, and says investors who deposit funds or crypto assets with a platform might cease to have legal ownership of those assets and might not be able to get them back when they want. It notes that some platforms have suspended withdrawals and entered bankruptcy, and that it is unclear how much customers might recover.
| Protection | Bank deposit | Brokerage account at a registered broker-dealer | Crypto platform account |
|---|---|---|---|
| Government deposit insurance (FDIC) | Yes, up to the limit | No | No |
| SIPC protection | No | Generally yes, for registered securities | No |
The table summarizes points from the SEC and FTC: banks offer FDIC insurance up to a limit, investors at registered broker-dealers generally benefit from SIPC protection and the customer protection rule, and there are no such protections for accounts with crypto asset entities. The SEC also cautions that a so-called proof of reserves is not as rigorous as a financial statement audit and may not show a platform’s liabilities.
Leverage risk
Some platforms offer borrowing, margin or derivatives. The CFTC explains that futures are usually funded with only a fraction of the underlying price, creating leverage, and that leverage amplifies the underlying risk. When prices move in your favor you make more on a small stake; when they move against you, losses grow just as fast. The CFTC calls speculating in these markets a high-risk transaction.
Theft and fraud risk
The CFTC says virtual currencies are commonly targeted by hackers and criminals, and there is no assurance of recourse if your crypto is stolen. The SEC describes the sector as replete with fraud, including bogus coin offerings, Ponzi and pyramid schemes and outright theft, and says recovering money can be nearly impossible. The scams to know are in Crypto Scams to Avoid: The Patterns Regulators See Most.
Self-custody risk
Holding crypto yourself removes platform risk but adds your own. The SEC’s custody bulletin says that if you lose your private key, you permanently lose access to the crypto in that wallet, and a private key cannot be changed or replaced once created. See Seed Phrases and Wallet Security: Protecting the Keys to Your Crypto.
Habits that limit the damage
- Only risk money you can afford to lose. The CFTC repeats this, and the SEC says the only money to put into a speculative investment is money you can afford to lose.
- Pay off high-interest debt first. The SEC notes no investment strategy pays off as well as, or with less risk than, eliminating high-interest debt.
- Have a plan and an allocation. The SEC suggests deciding in advance how much of your overall portfolio goes to short-term or speculative investments.
- Avoid leverage until you understand exactly how losses are calculated.
- Never invest in a product you do not understand, a point both the SEC and CFTC make.
Tip: Write down, before buying, the price at which you would sell and the amount you are willing to lose. Decisions made in advance hold up better than decisions made in a crash. The SEC advises not letting short-term emotions disrupt long-term objectives.
Risk and tax
Losses have one consolation: realized capital losses on crypto held as an investment can offset gains, under the IRS rules for property. The details and reporting are in Crypto Taxes in the US: What Is Taxable and How Much. For the mechanics of trading itself, see How Crypto Trading Works: A Beginner’s Map.