As with the other investment vehicles in this unit, let’s look at the BRTI of digital assets.
Digital assets may offer functional or practical uses, but from an investment standpoint they’re mainly associated with two potential benefits:
From 2019-2021, it was difficult to lose money on digital assets. Many cryptocurrencies produced returns well above 100% (a few above 1,000%), and some NFTs were selling for millions. This Forbes article describes 19 billionaires who accumulated wealth through cryptocurrencies.
Although some digital assets had existed for a decade or more (Bitcoin was developed in 2009), prices surged as the general public became more aware of them. That rapid increase created significant capital appreciation (buy low, sell high) for many investors.
Digital assets can also add diversification to a portfolio. The main idea behind diversification is to hold assets that don’t all move the same way at the same time - so when one part of the portfolio underperforms, another may hold up better.
For example, in 2020 the S&P 500 was up roughly 18%, while BTC was up over 300%. Having some exposure to digital assets during that period could have boosted overall portfolio returns.
Digital assets expose investors to several distinct risks. Some investors have built substantial wealth, while others have experienced major losses. The key risks covered here are:
Digital assets are known for extreme price volatility. To see this, compare the annual returns of three major cryptocurrencies with the S&P 500 from 2021-2024:
| 2021 | 2022 | 2023 | 2024 | |
|---|---|---|---|---|
| Bitcoin (BTC) | +90% | -81% | +155% | +121% |
| Ethereum (ETC) | +399% | -68% | +90% | 46% |
| Binance Coin (BNB) | +1270% | -67% | +27% | +134% |
| S&P 500 | +29% | -18% | +26% | +25% |
The top three cryptocurrencies fluctuated far more than the S&P 500, which is already considered a relatively volatile stock index. Many other digital assets have been even more volatile. For example, Dogecoin was down 80% in 2019, then increased 2,300% the following year.
Volatility can come from factors specific to a particular asset (such as changes in adoption, technology, or perceived usefulness) or from broader market forces that affect digital assets as a group. Either way, the price swings can be severe. If you need to sell during a downturn, losses can be substantial.
Digital assets are relatively new and technically complex, which creates opportunities for sophisticated fraud. According to an FTC report, cryptocurrency investors are particularly susceptible:
Since the start of 2021, more than 46,000 people have reported losing over $1 billion in crypto to scams - that’s about one out of every four dollars reported lost, more than any other payment method. The median individual reported loss? A whopping $2,600.
As discussed in the previous chapter, most digital assets are controlled through a private key. If a fraudster obtains someone’s private key, it’s similar to handing a thief the keys to a safe: the assets can be transferred away within seconds.
Many investors store digital assets in online (digital) wallets. If a scammer gains access to an investor’s computer or phone, it may be easy to capture private keys. One common method is phishing, where scammers create fake messages that appear to come from a trusted source.
For example, suppose an investor holds digital assets on a cryptocurrency exchange (e.g., Binance). They receive an email that appears to be from Binance about an account issue, with a link to contact customer service. The investor clicks the link, which installs malware. The email was fake, and the malware sends personal data (including login credentials and private keys) to the scammer.
Pig butchering schemes are another common form of digital asset fraud. In these schemes, the scammer builds a relationship (sometimes romantic) with an unsuspecting victim and then gradually solicits investments into fake digital assets or platforms. The North American Securities Administrators Association (NASAA) identified this scheme as the second biggest investor threat in 2023. According to the Department of Justice:
“The victims in Pig Butchering schemes are referred to as ‘pigs’ by the scammers because the scammers will use elaborate storylines to ‘fatten up’ victims into believing they are in a romantic or otherwise close personal relationship. Once the victim places enough trust in the scammer, the scammer brings the victim into a cryptocurrency investment scheme.”
High yield investment programs (HYIPs) are also common in the digital asset marketplace. These scams typically promise unusually high returns with little-to-no risk. California’s state administrator provides this example of a fraudulent HYIP:
You see a video on YouTube from someone who looks like they know about investing. The person is talking about a new investment opportunity they recently discovered. In the video, the person is explaining how easy it is to get started and deposit money. The person is also showing off the amazing profits they’ve already made in this investment. It sounds like a great way to invest and make money!
You go to the website, sign up, and select an investment package. Then, the website gives you a crypto wallet address to deposit your funds into. You deposit the crypto asset and over the next few days, weeks, months, or more, you regularly log in to the website and it shows that your account balance is going up and you’re making the high returns as promised! You try withdrawing some of your funds and it works. You deposit more money and now you’re making even higher returns. Then, one day, the website tells you that it is experiencing temporary withdrawal issues. Finally, a few days later, the website is no longer online.
Many digital-asset-related scams begin through text messages or social media. Because transactions can be fast and difficult to reverse, investors need to be especially skeptical of unsolicited messages and “too good to be true” claims.
Any valuable asset held in digital form can be hacked. This can happen at the individual level or at the platform level.
A well-known example is the BTC exchange Mt. Gox, where over 650,000 BTC were lost (worth over $77 billion as of July 2025).
Investors can also lose access to their own digital assets. This risk is especially relevant for people who store private keys in hardware or paper wallets. In the previous chapter, we discussed a man who mistakenly threw away a hard drive holding the private key to 7,500 BTC (worth more than $893 million as of July 2025).
Market manipulation is the act of artificially influencing the price of an asset or commodity. This has long been a problem in financial markets. A future chapter covers how this unlawful activity affects the securities markets.
Digital asset markets can be especially vulnerable. Common forms of manipulation include:
Pump and dump schemes
A pump and dump scheme typically involves someone who already owns a lesser-known digital asset promoting it as a great opportunity. If the promotion reaches enough people, new buyers may drive up demand and price. After the price rises, the promoter sells their holdings for a profit.
The infamous John McAfee was charged with fraud connected to this type of scheme before his death:
McAfee used his verified Twitter account, which currently has around 1 million followers, to recommend a “Coin of the Day” or “Coin of the Week.” The indictment says McAfee claimed to have no stake in these altcoins; in reality, McAfee would allegedly buy large quantities beforehand using bitcoin, then offload them again after his followers had driven up the price.
Wash trades
A wash trade involves buying and selling a digital asset for the primary purpose of creating the appearance of active trading. For example, a group of fraudsters might build a large position in a relatively unknown cryptocurrency and then trade it among themselves to inflate reported trading volume. Other investors may interpret the higher volume as a sign of growing interest and buy in, increasing demand and price. Once the price rises, the fraudsters sell for a profit.
Dissemination of false or misleading information
Digital assets are also prone to manipulation through false or misleading information, especially because social media can spread messages quickly to large audiences. A person with a large following can influence market behavior by sharing inaccurate claims.
For example, a group of investors sued Elon Musk and alleged his “trolling,” misleading tweets, and public comments caused significant losses in Dogecoin.
Some digital asset platforms have appeared to shut down with little warning due to weak structures or mismanagement, leading to significant customer losses. Examples include:
Digital assets combine high volatility with multiple operational and fraud-related risks. While that risk can come with high return potential, most investors should either avoid digital assets entirely or limit them to a small portion of the portfolio. Many advisers recommend allocating no more than 5% to this type of speculative investment.
Investors who make significant allocations to digital assets are typically highly aggressive and have long time horizons (so they can potentially recover from large drawdowns). They also need enough technological sophistication to reduce scam risk and enough understanding of the asset’s mechanics and marketability to evaluate what they’re buying. The volatility common to many digital assets increases these risks further.
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