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WalletPrep worksheet · Investing

What are the risks of investing in crypto?

Name ____________________ Date __________

Key ideas

  1. Crypto has no FDIC or SIPC protection. If a crypto platform fails or is breached, no government insurance pays you back. Banks and brokerages have protections that crypto lacks.
  2. Only scammers demand payment in crypto. The FTC says no real business, agency or bank will ask you to pay or protect your money in crypto.
  3. Selling or spending crypto is a taxable event. The IRS treats crypto as property. Selling it, trading it or buying something with it can create a capital gain.

Vocabulary

Cryptocurrency
Digital tokens whose ownership is recorded on a shared online ledger called a blockchain. They are not issued by any government and are not insured.
FDIC insurance
US government protection that repays your deposits if an insured bank fails, up to $250,000 per depositor, per bank, per ownership category.
SIPC protection
Protection for brokerage customers if the brokerage firm fails and their investments or cash are missing, up to $500,000, including $250,000 in cash.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
Capital gains
The profit when you sell an investment for more than you paid. It is taxed when you sell, in a regular brokerage account.
Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.

Work it out

Jordan has $10,000 in index funds and wants to try crypto. He compares buying $500 or $5,000, assuming crypto falls 70% soon after he buys.

  1. Assumed drop
  2. Small position
  3. Loss at 70%
  4. Left from $500
  5. Large position
  6. Loss at 70%
  7. Left from $5,000

Check yourself

  1. You put $800 into crypto and the price falls 60%. How much is it worth?

    • A. $320
    • B. $480
    • C. $740
    • D. $200

  2. Someone says you must pay a fine in crypto or be arrested. What is it?

    • A. A normal government request
    • B. A scam
    • C. A bank fee
    • D. A tax payment

  3. What protects crypto held on an exchange if the exchange fails?

    • A. FDIC insurance
    • B. SIPC protection
    • C. The IRS
    • D. Usually nothing

Your turn

If you own crypto, add up what you paid and what it is worth now, and write down the most you are willing to hold. If you don't own any, check that your emergency fund and 401(k) match are done before you consider it.

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Answer key

What are the risks of investing in crypto?

Work it out

  1. Assumed drop70%
  2. Small position$500
  3. Loss at 70%− $350
  4. Left from $500= $150
  5. Large position$5,000
  6. Loss at 70%− $3,500
  7. Left from $5,000= $1,500
  1. With $500, a 70% drop costs $500 × 70% = $350. That is $350 ÷ $10,500 = about 3% of everything he has invested.
  2. With $5,000, the same drop costs $5,000 × 70% = $3,500. That is $3,500 ÷ $15,000 = about 23% of everything he has invested.
  3. Same coin, same drop. The amount he chose is what decides whether it is a small setback or a serious one.

Check yourself

  1. A. $320 The loss is $800 × 60% = $480, so $800 − $480 = $320 is left.
  2. B. A scam The FTC says only scammers demand payment in cryptocurrency. No real agency or business will ask for it.
  3. D. Usually nothing Crypto is not FDIC insured, and SIPC does not cover crypto that isn't a registered security. Customers of failed platforms may not get their money back.