Risks of cryptocurrency
While the eye-popping short-term returns of some cryptos can make them seem like appealing ways to turn a profit, it’s important to know the risks when buying, selling, and spending cryptocurrencies.
In addition to significant and unexpected price swings, the laws surrounding cryptocurrencies are constantly evolving and the future regulatory environment is currently uncertain.
For example, current US tax code requires you to report transactions involving crypto, such as when you sell it for a profit and even when you exchange it to receive a good or service. If your crypto has increased in value since you purchased or received it, your transaction becomes a taxable gain that you must report to the IRS on your tax return. This could make buying everyday items with crypto at large scale unwieldy and cumbersome. There’s still much that remains to be determined with crypto, from how people treat it—whether it’s a store of value like a currency or an investable asset like a stock—to how governments view it. Future legislation may ultimately determine which way people use crypto as regulations may make certain uses impractical.
New legislation could also upend or have a significant impact on the price of any cryptocurrency. Crypto holdings are not insured, like money in a bank account, and therefore could be lost.
Platforms that buy and sell bitcoin may be unregulated, can be hacked, may stop operating, and some have failed. In addition, like the platforms themselves, digital wallets can be hacked. As a result, consumers can—and have—lost money.
Consider how many of these risks you are willing to take on before you purchase any cryptocurrency. Remember that it’s not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC), meaning you should only buy crypto with an amount you’re willing to lose.
