As with the other investment vehicles in this unit, let’s look at the BRTI of digital assets.
Digital assets can offer many functional and practical benefits, but from an investment perspective they’re mainly used for two reasons:
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 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 goal of diversification is to hold assets that don’t always move together, so strength in one area can help offset weakness in another. For example, in 2020 the S&P 500 rose roughly 18%, while BTC rose over 300%. In that period, having some exposure to digital assets could have boosted overall portfolio returns.
Digital assets expose investors to several distinct risks. Some investors have built substantial wealth, while others have experienced significant losses. This section covers:
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% |
These returns show that the top cryptocurrencies fluctuated far more than the S&P 500, which is already considered a relatively volatile stock index. Many other digital assets are even more volatile. For example, Dogecoin fell 80% in 2019 and then rose 2,300% the following year.
Volatility can come from factors specific to a particular asset, or from broader market-wide events. Either way, you should treat digital assets as a “roller coaster” investment: a sharp decline at the wrong time can be financially devastating.
Digital assets are new and complex, which creates opportunities for sophisticated fraud. According to an FTC report, cryptocurrency investors are particularly vulnerable:
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 your private key, it’s similar to losing a traditional wallet to a thief: the assets can be drained quickly.
Many investors store digital assets in online (digital) wallets. If a scammer gains access to a person’s computer or phone, it may be easy to obtain 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 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 “customer service.” The investor clicks the link, malware is installed, and the malware transmits stored 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. The Department of Justice describes the approach this way:
“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 fraudulent schemes involving digital assets begin through text messages or social media. Because of that, 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 the organizational level. For example, a hacker might access an investor’s private keys through a public WiFi system. Or a cryptocurrency exchange that holds customer assets could be hacked, creating major losses for both the organization and its customers.
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 without any hacking. This risk is especially relevant for people who store private keys in hardware or paper wallets. For example, in the previous chapter, we discussed a man who mistakenly threw away a hard drive holding his 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. It has long been a problem in financial markets. We’ll cover how this unlawful activity affects the securities markets in a future chapter. For now, here are common forms of manipulation seen in digital asset markets:
Pump and dump schemes
A pump and dump scheme usually involves someone who already owns a lesser-known digital asset promoting it as a great opportunity. If the promotion reaches enough people, new buyers increase demand and push up the price. After the price rises, the promoter sells and profits.
The well-known 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 trading a digital asset for no legitimate purpose other than to create the appearance of activity and attract other investors. 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 notice the increased activity and buy in, hoping to profit if the price goes “to the moon” (rises sharply). Once demand pushes the price higher, the fraudsters sell for a profit.
Dissemination of false or misleading information
Digital assets are particularly vulnerable to manipulation through false or misleading information, largely because social media can spread messages to large audiences quickly. A fraudster with a large following can influence sentiment and trading behavior with minimal effort.
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 “overnight” due to weak structures or mismanagement, leading to major customer losses. Examples include:
The digital asset marketplace involves substantial risk and volatility. While higher risk can come with higher return potential, most investors should either avoid digital assets entirely or limit them to a small portion of the portfolio. Many advisers suggest allocating no more than 5% to this type of speculative investment.
Only the most aggressive investors with long time horizons (so they have time to recover from potential losses) should consider significant investments in digital assets. In practice, this also requires strong technological awareness to reduce scam risk and a solid understanding of how the assets work and whether they have lasting market demand. The volatility common to many digital assets increases these risks even further.
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