Crypto risk: respect the volatility

Crypto can be exciting, useful and, at times, very profitable. It can also be brutal. You do not need to love it or hate it, but if you participate, you should know exactly which risks you are taking on. Here are the big five.

1. Volatility that would break most stocks

Crypto prices move fast. Daily swings of 5% or more are common, and volatility is typically far higher than for broad stock indexes. Bitcoin, the largest and most established coin, has suffered a drawdown of more than 75% from its peak several times, and smaller coins have often fallen 90% or more, many never to recover. Before you buy, picture your position cut by three-quarters, because history says it can happen.

Borrowed money multiplies the danger. Some platforms offer extreme leverage; at 10x, a 10% move against you can wipe out your entire position in minutes.

2. Scams follow the money

Where there is hype, there are hustlers. The FBI's Internet Crime Complaint Center has reported crypto investment fraud among the costliest forms of online crime it tracks. Common patterns:

• Rug pulls: creators hype a new token, collect investors' money, then drain the funds and vanish.
• Phishing and impersonation: fake support agents, lookalike sites and "wallet verification" requests designed to steal your seed phrase.
• Relationship scams: a friendly stranger spends weeks building trust, then steers you to a fake trading platform that shows big gains but never lets you withdraw.
• Guaranteed returns: anyone promising fixed high returns with no risk is waving the biggest red flag in finance.

3. No undo button

Blockchain transactions are effectively irreversible. Send coins to the wrong address, approve a malicious smart contract or pay a scammer, and there is usually no bank to reverse it and no chargeback to file. Slow down before every transfer; urgency is a scammer's favorite tool.

4. Stablecoins are not risk-free

A stablecoin aims to hold a steady value, usually $1, and is widely used to move money around crypto markets. Its stability depends on what backs it:

• Reserve-backed stablecoins hold cash and short-term government debt. Even so, when Silicon Valley Bank failed in March 2023, a major stablecoin with reserves at that bank briefly fell well below $1.
• Algorithmic stablecoins rely on code and market incentives instead of full reserves. In 2022, TerraUSD lost its peg and collapsed, wiping out tens of billions of dollars in value.

The same caution applies to DeFi apps advertising high yields: returns that look too good usually hide risks such as code bugs, hacks or unsustainable incentives.

5. Rules still being written

Crypto regulation varies by country and keeps evolving. In the U.S., agencies such as the SEC and the Commodity Futures Trading Commission oversee different parts of the market, and lawmakers continue to shape new rules. Regulatory news can move prices sharply, and consumer protections remain thinner than in traditional finance.

The other side of the ledger

None of this means crypto is worthless. Bitcoin has survived every crash so far, and in January 2024 the SEC approved the first U.S. spot bitcoin ETFs. Blockchains run around the clock, settle transfers globally and keep transparent public records. Reasonable people disagree about crypto's long-term value. The practical stance is respect: understand the risks, size positions you could lose without real harm, and watch sentiment gauges like the Fear & Greed Index on the Pulse dashboard. Readings of extreme greed tend to come with frothy, riskier conditions. How much to own is the subject of Sizing crypto.