Investing in Cryptocurrency: Risks and Benefits

Unless you have been living under a rock for the past few years, you have probably heard of cryptocurrency. Cryptocurrency has taken several forms such as Bitcoin, Ethereum and Dogecoin, just to name a few. Cryptocurrency can be used for a variety of purchases such as Non-Fungible Tokens (NFT). Cryptocurrency can also be used for goods and services. For example, Tesla allows the purchases of their vehicles with cryptocurrency. So, with that said, what exactly are the risks and benefits of investing your money in cryptocurrency?

Risk: Volatility

Volatility in cryptocurrency is how much the price of a crypto coin/token will change in a period. Not all cryptocurrencies are equal when it comes to volatility. For example, Bitcoin is a cryptocurrency that has been seen as relatively “safe” when it comes to cryptocurrency — a view echoed by analysts at Forbes Advisor who classify Bitcoin as a “blue-chip” digital asset. On the other hand, a coin like Dogecoin has been known to be extremely volatile. This means that the price of one Dogecoin can vary dramatically, making it much more of a risk when it comes to investing in cryptocurrency. The U.S. Securities and Exchange Commission (SEC) has repeatedly warned retail investors about the dangers of crypto volatility, noting that prices can drop by double-digit percentages within hours.

Benefit: Make a lot of money quickly

When it comes to cryptocurrency, a lot of money can be made in a short time. For example, in the beginning of 2021, Dogecoin saw a huge increase in value. Many investors were able to increase their investment by a substantial amount. In fact, from January to May of that year, Dogecoin surged 12,000%, as tracked by CoinMarketCap’s historical price data. This means that if you were able to get in early on this cryptocurrency, then you were able to make a substantial amount of money. To return this type of profit, typically, you would have to invest in a cryptocurrency that carries a higher volatility. Investment platforms like SoFi and Robinhood have made it easier than ever for retail investors to access these high-volatility assets, though both platforms also remind users that past performance is not a guarantee of future results.

Risk: Not insured

Unlike investing in the stock market, investing in cryptocurrency is not insured. This means that if something should happen to your investment, there is nothing protecting you. The responsibility of protecting your investments falls completely on you. The Federal Deposit Insurance Corporation (FDIC) has made it explicitly clear that cryptocurrency assets do not qualify for federal deposit insurance, unlike the cash you hold in a traditional bank account which is insured up to $250,000. If, for example, you forget the password to your crypto wallet and can no longer access it, then you have more than likely lost whatever cryptocurrency/money was inside that wallet. The Consumer Financial Protection Bureau (CFPB) has similarly issued guidance urging consumers to understand that there is no federal safety net for crypto losses.

Benefit: Protection against inflation

Inflation, especially in America, is an ever-present problem that the Federal Reserve actively works to manage through monetary policy. However, cryptocurrency can offer some protection when it comes to inflation. This is because most of the blue-chip cryptocurrencies, such as Bitcoin, have a finite supply of coins — specifically, Bitcoin’s supply is hard-capped at 21 million coins, a fact documented extensively by the Investopedia research team. This acts like other finite resources, such as gold, because when there is a demand and a limited supply, the price for that supply is going to go up. This is not the case with the USD. The value of USD goes down because more is being created all the time, a concern that economists at institutions like JPMorgan Chase have raised in published research. This means that investing in cryptocurrency could protect you from inflation in the future.

Risk: Not accepted many places

Unlike cash and most major credit cards, you cannot use cryptocurrency to make purchases at most businesses. This can be a big inconvenience, especially if all your money is tied up into cryptocurrency. While some major companies are allowing the use of cryptocurrency to make purchases, such as Whole Foods and PayPal, many are still not there yet. Visa and Mastercard have both piloted crypto-linked card programs, but widespread point-of-sale acceptance remains limited as of April 2026. If you are traveling, and have most of your money in cryptocurrency, then carrying cash would be strongly suggested.

Benefit: You own your cryptocurrency

If you have your cryptocurrency in an actual digital crypto wallet, then you legitimately own your cryptocurrency. This means that you have total control of your assets and are not at the mercy of a bank. You are free to sell your cryptocurrency if you choose to, or you can simply give it to anyone you choose, because you own it. Hardware wallet providers like Ledger offer cold storage solutions that keep your private keys entirely offline, further reducing your exposure to exchange hacks or third-party failures. You are also less vulnerable to many government regulations or policies that would affect you if you kept all your money in a bank — though it is worth noting that the IRS still treats cryptocurrency as taxable property, and capital gains tax applies to profitable sales.

Risk: If it’s lost, then it’s gone

If you lose access to your cryptocurrency, then it is gone forever. One of the benefits of cryptocurrency can also become a risk. Most cryptocurrency wallets are very safe and require multiple verification processes in order to access your wallet. The wallets are so safe in fact, that if for some reason you forget the credentials necessary to access your wallet, then you have technically lost whatever money was in that wallet. Research from Chainalysis has estimated that approximately 3 to 4 million Bitcoin — worth hundreds of billions of dollars — may be permanently lost due to forgotten passwords and inaccessible wallets. For this reason, you should make sure to keep your password(s) somewhere safe and accessible just in case you forget.

Benefit: Passively earned income

I am sure you have heard the term “passive income.” This means that you can earn an income without really doing anything at all. Cryptocurrency can act as a passive revenue stream. There are websites where you can stake your cryptocurrency and you will be paid a percentage of that stake over a period of time. Platforms like Coinbase and Kraken offer staking programs with annual percentage yields (APY) that can range from 3% to over 20% depending on the cryptocurrency chosen. Also, just by simply investing in a cryptocurrency can create a passive income. For example, if you invest in a cryptocurrency, and the value increases over time, then you have just earned more money without actively working. This is conceptually similar to earning dividends on a stock, though unlike stock dividends, staking rewards are not regulated by the SEC in the same way.

As mentioned previously, cryptocurrencies have a wide variety of risks and benefits associated with them. Some cryptocurrencies carry less risk than others. However, just as with any other investment, the higher the risk usually results in a higher reward. Investing in anything can be a tricky proposition, so it is best to educate yourself as much as possible before you commit anything to any kind of investment.

Cryptocurrency Risks vs. Benefits at a Glance

Frequently Asked Questions

Is cryptocurrency a good investment in 2026?

Cryptocurrency can be a worthwhile investment in 2026 for those with a high risk tolerance and a long-term outlook. It is not appropriate for everyone — the SEC and CFPB both recommend that investors only allocate money they can afford to lose entirely. Diversifying across asset classes, including stocks and bonds, is generally advised by financial professionals.

What are the biggest risks of investing in cryptocurrency?

The biggest risks include extreme price volatility, the total lack of FDIC insurance, the permanent and unrecoverable nature of lost wallet access, limited merchant acceptance, and evolving regulatory scrutiny from agencies like the SEC. Any one of these factors can result in a partial or total loss of your investment.

What is the safest cryptocurrency to invest in?

Bitcoin and Ethereum are generally considered the least risky cryptocurrencies due to their market size, liquidity, and established track records. That said, even Bitcoin has experienced drawdowns of more than 80% during bear market cycles, so “safest” is relative in this asset class.

Can cryptocurrency protect you from inflation?

Bitcoin’s hard cap of 21 million coins gives it a scarcity-based value model similar to gold, which can act as a partial inflation hedge. However, cryptocurrency prices can also fall sharply during periods of economic stress, so it is not a guaranteed hedge the way some proponents claim.

Is cryptocurrency insured by the FDIC?

No. The FDIC does not insure cryptocurrency holdings under any circumstances. FDIC insurance applies only to cash deposits at member banks, up to $250,000 per depositor per institution. If your crypto exchange collapses or your wallet is compromised, there is no federal backstop to recover your funds.

How do you earn passive income with cryptocurrency?

You can earn passive income by staking your cryptocurrency on platforms like Coinbase or Kraken, where your holdings are used to validate blockchain transactions in exchange for yield. Annual percentage yields (APY) typically range from 3% to 20%+ depending on the asset. Simply holding an appreciating asset also generates unrealized passive gains over time.

What happens if you lose your crypto wallet password?

If you lose access to your crypto wallet credentials and do not have a backup recovery phrase, your funds are permanently and irrecoverably lost. Chainalysis estimates that between 3 and 4 million Bitcoin have been permanently lost this way. Always store your seed phrase and passwords securely in multiple locations.

Where can you spend cryptocurrency?

As of April 27, 2026, cryptocurrency is accepted by a growing but still limited number of businesses. Major companies including PayPal, Whole Foods, and Tesla have enabled crypto payments. Visa and Mastercard have also launched crypto-linked card products. However, the majority of everyday retailers have not yet adopted crypto payment systems.

Is cryptocurrency taxed in the United States?

Yes. The IRS classifies cryptocurrency as property, not currency, for tax purposes. This means that selling, trading, or spending cryptocurrency triggers a capital gains tax event. Short-term gains (held less than one year) are taxed as ordinary income, while long-term gains (held more than one year) qualify for lower capital gains rates. Staking rewards are also generally treated as ordinary income.

What is the difference between Bitcoin and Dogecoin as investments?

Bitcoin has a capped supply of 21 million coins, institutional backing, and is widely considered a store of value. Dogecoin has no supply cap, was originally created as a joke, and is far more volatile. Dogecoin surged 12,000% in early 2021 but also experienced devastating crashes. Bitcoin is generally considered lower risk, while Dogecoin carries significantly higher speculative risk.