Bitcoin Remains a Dangerous Wager Even When Its Price Rallies
A lack of regulation and price volatility are just two of many risks
Don’t be too fast to invest in bitcoin and other digital currencies when you see prices shooting up. The cryptocurrency market remains as volatile as ever—as of today, bitcoin’s price is down more than 50 percent in 2022—and fraud and security are a big concern.
Just look at what happened to bitcoin, which has shed about two-thirds of its value since its peak of $67,000 per coin in November 2021. And there are still many factors that could push cryptocurrencies even lower. So investors should proceed with extreme caution.
“People are desperate for anything that can bring them instant wealth, but [cryptocurrencies] are very risky investments because the technology is new and unproven,” says Jerry Brito, executive director of Coin Center, a nonprofit research and advocacy group in Washington, D.C., that’s focused on the public policy issues facing the cryptocurrency industry. “You shouldn’t invest in stuff you don’t understand, and you shouldn’t be investing money that you can’t afford to lose.”
While admitting you’re confused about crypto may leave you feeling like a Luddite, it’s understandable—and you’re not alone.
Fraud and Security Concerns
The most popular way to buy and sell cryptocurrencies is through an exchange where buyers and sellers come together online to trade.
But some exchanges are fake, luring unsuspecting investors to open an account. When they make a purchase, the criminals steal the money and the investor never receives the cryptocurrency.
Even legitimate exchanges can be dangerous because many of them may not have adequate security in place. Prominent exchanges have been robbed by hacker groups of billions of dollars’ worth of cryptocurrency. Consumers reported losing over $1 billion to fraud involving cryptocurrencies just from January 2021 through March 2022, according to an analysis from the Federal Trade Commission. The biggest hack in history occurred in August of 2021, in which an exchange named Poly Network lost $610 million, according to Coin Central. More recently, an exchange known as Wormhole lost $32 million to hackers. In such cases there’s very little authorities can do to recover the funds.
Matt Mitchell, a tech security researcher, says that while lax security is a big risk, there are some exchanges that have invested in technology to lock down their systems. Among them, he says, are CoinDesk, GDax, and Kraken.
Initial Coin Offerings Provide Few Protections
For some people, one attraction of cryptocurrencies is the ability to participate in an initial coin offering, or ICO. Investors jump in, hoping to get the digital currency at a low price and then profit as it rises.
But ICOs are far riskier than stock IPOs—and have other key differences.
For one thing, in an IPO, the average investor can’t easily participate. Companies going public award their shares to institutional investors, which may then make them available to their customers as long as their income meets certain thresholds. In this way, average investors can’t take undue risks that could wipe them out.
That’s not so with ICOs—anyone can participate. The result is that some overeager investors may take on too much financial risk.
Another difference: ICOs don’t have to live up to the same high standards as IPOs. Before a company can file to go public, it has to show a minimum earnings level, undergo audits, issue a prospectus that explains the company’s financials, etc. In other words, by the time shares are offered to the public there has been some due diligence, the shares are considered viable, and investors have access to information.
No such safeguards exist for ICOs. Cryptocurrency issuers might not even have a track record that investors can examine to see whether the company is financially sound. While many do publish a white paper explaining why they’re raising funds, there’s no legal requirement that they do so.
In the past, the SEC has warned investors that it might not effectively pursue bad actors or recover funds for investors, partly because these markets often operate outside the U.S.
There Will Be Fees
It’s true that when bitcoin was created, the idea was partly to create a bank alternative as a way to avoid high fees, Mitchell says. But trading cryptocurrencies will still cost you, usually a fraction of a percent of the total transaction amount, depending on the exchange.
You can avoid exchanges and buy and sell bitcoin through, say, a cryptocurrency wallet—an app you load on your smartphone. The fee you’re charged will depend on the total number of people globally who are buying and selling that currency. The more people trading, the higher the fee, Brito says.
Years ago, before most people were thinking about trading bitcoin, a wallet transaction fee was puny. In 2019 it averaged around 6 cents, according to Bitinfocharts, a fee tracker. That rose to around $65 per transaction when crypto mania sent prices (and orders) soaring in 2021. As bitcoin’s price crashed back down to earth, transaction fees also fell. They were hovering around $1.70 as of early August, according to Bitinfocharts.
Cryptocurrencies Are Easy to Lose
When you buy a cryptocurrency and place it in your smartphone’s cryptocurrency wallet, if you don’t back up the app and you lose your phone, you’re out of luck. If you misplace or accidentally delete your “key”—a long password that’s generated when you open your account—there’s no “forgot my password” option to help you.
Mitchell says that phone operating systems could also become corrupted, which might delete a wallet from a user’s phone. That’s why there’s new hardware now available for people to back up and secure their wallets.
Editors Note: This article has been updated with more details about Consumer Reports’ cryptocurrency survey responses.