Understanding risk and volatility in crypto markets

Cryptocurrency presents a unique opportunity to participate in a rapidly evolving financial ecosystem, but as with any investment, it’s essential to understand the risks alongside the potential rewards.

This guide highlights some key risks to consider, so you can make informed decisions and navigate the crypto market more confidently.

Risks common to crypto and some other asset classes include:

• Volatility: Market fluctuations are par for the course in investing, but cryptocurrencies are known for their exceptional volatility, with bitcoin and ethereum ranking among the world’s most volatile assets.
• Concentration: Cryptocurrencies often have concentrated ownership, meaning a small number of holders own a large portion of the total supply. For example, the top 100 holders of bitcoin own about 18% of its total supply.¹ This concentration can give a few individuals or entities significant market influence, potentially leading to dramatic price swings if they decide to buy or sell a large amounts at once.

Investors should also be aware of risks unique to cryptocurrency, including:   

• Encryption and software bugs: Cryptocurrencies rely on encryption to secure transactions. However, if encryption techniques fail for a particular cryptocurrency, the resulting erosion of trust and exposure of private keys could lead to significant losses in its value and increased volatility. Software bugs can also cause issues, such as unexpected price inflation if more coins are created than intended. Ethereum, for instance, faces higher software risks due to frequent code changes and its complex nature.
• Market saturation: The proliferation of new platforms for cryptocurrency and decentralized apps creates increased competition that may weigh on coin values. For example, Ethereum currently leads the “smart contract” market, but its share could erode as rivals like Binance Smart Chain and Solana emerge.
• Scalability issues and high fees: Cryptocurrency transactions run on blockchain technology. As a blockchain expands, it requires more computing memory to operate, but some blockchains may not be able to expand fast enough to keep pace with demand from users. As more investors compete for limited blockchain space, transaction fees could rise.
• Government actions: While the regulatory landscape has grown more crypto-friendly recently, it is constantly evolving. Adverse government actions or regulations in the future could weaken demand for crypto and even cause blockchains to split into less valuable regional versions.
• Limited recourse if crypto is lost or stolen: Considering cryptocurrencies are not regulated by a central body, there are limited resources to recover lost or stolen assets. Bitcoin transactions are designed to be irreversible, making the assets hard to recover if something goes awry.
• Cryptocurrency scams: Be wary of too-good-to-be-true investment opportunities that involve cryptocurrency. For example, in a scam known as “pig butchering” a bad actor will try to establish a dialogue with their victim and gain their trust before offering a crypto investment opportunity—but once the victim has sent the funds, the scammer will “butcher” the relationship and disappear with the money.

Understanding the risks associated with crypto investing is crucial for making informed investment decisions. From traditional risks like concentration and volatility to future uncertainties like government regulation, being aware of these factors can help you decide if cryptocurrency is right for your portfolio.

Article Footnotes

¹ Morgan Stanley Global Investment Office, Investing in Cryptocurrency, by Denny Galindo, published Aug. 5, 2025.

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