Crypto Trading Risks: What Investors Need to Know

Thinking about getting into crypto? Bitcoin, Ethereum and a host of smaller digital tokens have opened up a new landscape of investment options. The crypto space can be exciting and rewarding, but it also carries unique risks. Cryptocurrencies remain highly speculative, not only because of big price swings but also due to technological, regulatory and security challenges.

While dramatic gains are possible, so are sudden and significant losses. Understanding the risks—price volatility, technical vulnerabilities, low liquidity, scams, hacks, uncertain regulation and tax implications—can help you decide whether and how to participate. The sections below summarize the main risks that can affect the value of your crypto investments and how to protect yourself.

Price volatility

Cryptocurrency prices are notoriously volatile and can move sharply in short periods. For example, on May 19, 2021, bitcoin’s price fell about 30% after China tightened rules on mining and trading. Crypto values can rise or drop based on investor sentiment, global news, adoption trends, protocol upgrades, regulatory developments, security breaches and market manipulation.

Because crypto is still a relatively young asset class, markets are often in a state of price discovery. That can mean wider swings than in more established assets, and it increases the possibility of rapid gains or steep losses. Investors should be prepared for significant short-term moves and consider whether they can tolerate that level of risk.

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Technology risks

Blockchain technology relies on decentralization, cryptography and consensus mechanisms to secure transactions, but no system is completely immune to flaws. Software bugs, data errors and attacks on network consensus—such as a 51% attack—can undermine confidence and value.

Protecting your holdings starts with basic measures like regularly backing up your wallet and storing recovery phrases safely. However, larger systemic threats exist, including the long-term implications of quantum computing. If powerful quantum computers were able to break current cryptographic protections, attackers could potentially forge transactions or alter blockchains—an outcome that could devastate crypto values. While post-quantum solutions are being explored, this remains a risk to monitor.

Low liquidity

Liquidity describes how quickly and easily you can convert an asset to cash. Many cryptocurrencies—especially lesser-known tokens—have limited liquidity compared with stocks or bonds. Low liquidity can mean larger bid-ask spreads and slower trade execution, increasing the chance of slippage: the difference between the expected trade price and the executed price.

Slippage can be positive or negative. Typical slippage in crypto trading often ranges from about 0.05% to 0.1%, but it can be much higher for highly volatile or thinly traded coins. To reduce negative slippage, consider using trading platforms that offer limit orders, slippage estimates and warnings.

Scams and fraud

As crypto’s popularity has grown, so have scams. Fraudulent schemes range from fake exchanges and Ponzi setups to “rug pulls” where creators abandon a project and run off with investor funds. Notable examples include the collapse of QuadrigaCX, which left investors with large losses, and the Squid Game token rug pull in 2021.

In the first half of 2024, Canadians reported nearly $107 million in investment scam losses, with about $51.6 million attributed to crypto fraud, according to the Canadian Anti-Fraud Centre. Many victims were lured by deceptive ads or compromised social media accounts. Common scam types include fake trading platforms, Ponzi schemes, phishing, tech-support scams and pump-and-dump schemes that inflate a token’s price before operators sell off their holdings.

Be skeptical of unsolicited investment pitches, overly generous returns, and any offer that pressures you to act quickly. Learn the common warning signs and how to report suspicious activity. Exercise caution around initial coin offerings (ICOs) and token airdrops, which are often used in scams.

Crypto hacks

Hacks targeting exchanges, decentralized protocols and individual wallets have resulted in losses of hundreds of millions of dollars. High-profile incidents include the April 2022 breach of the Ronin Network, where thieves stole more than US$600 million, and the December 2021 hack of the BitMart exchange, which lost roughly US$200 million after a hot wallet key was compromised.

Individual investors are also vulnerable to targeted attacks like SIM swapping, cryptojacking and malware that steals private keys. Guarding against hacks means using strong, unique passwords, two-factor authentication, hardware (cold) wallets for long-term storage and reputable custodial services when needed.

Legal and regulatory uncertainty

Cryptocurrencies operate on decentralized networks, which can offer faster, lower-cost transactions but also leave users without the protections of regulated financial systems. Around the world, governments vary in their approach—some permit or embrace crypto, others restrict or ban it.

In Canada, crypto activity is increasingly subject to regulation. Securities laws can apply to certain digital assets, and the Canada Revenue Agency treats crypto as a commodity for tax purposes. Regulators have pressured exchanges and platforms to register and comply with oversight, but the framework is still evolving, which adds uncertainty for investors.

Human error

Human mistakes are a common cause of crypto losses. Losing private keys or forgetting seed phrases can permanently lock you out of your funds. Other errors include sending tokens to the wrong address or blockchain, choosing the wrong asset, or entering an incorrect price—so-called “fat finger” errors. Even companies have made costly mistakes, such as sending the wrong currency or creating excess tokens, which can undermine market confidence.

Income taxes

Crypto earnings are taxable. Depending on your activities—trading, mining, staking or selling NFTs—profits may be treated as capital gains or business income. Many investors unintentionally accumulate tax liabilities by trading or receiving crypto without tracking taxable events. If you mine or stake crypto, report that income and keep detailed records to comply with tax rules and avoid penalties.

Protecting yourself from crypto risks

Crypto is one of many investment options that carry risk. To participate more safely, take time to research and prepare:

Research each coin. Understand a token’s purpose, market capitalization, trading volume, use cases and whether it can be staked.
Choose trading platforms carefully. Check for regulation, security measures, fees and customer support before depositing funds.
Secure your keys and seed phrases. Learn how to use hot and cold wallets and store recovery phrases offline in a secure location.
Watch for fraud and scams. Be skeptical of promotions and free token offers that promise outsized returns.

Even with precautions, keep crypto holdings to a size you can afford to lose. Many investors limit digital assets to a modest portion of the speculative “explore” side of a diversified portfolio. The bottom line: never invest more than you can bear to lose, and always do your homework before committing funds.

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