Cryptocurrency—Is It Best to Stay Away? Understanding the Risks Associated With Digital Assets

What Are Crypto Assets?

Crypto assets are digital assets that exist only as electronic data and are traded exclusively online, with no physical form. According to the Japanese government’s official online publication, crypto assets are property that can be exchanged for legal tender and have value that is electronically recorded and transferred. In 2020, legal reforms changed the official designation from “virtual currency” to “crypto assets,” though both terms remain in common use today.

The defining feature of crypto assets is that they are not issued or guaranteed by banks or governments. Their value depends entirely on market supply and demand, which leads to significant price volatility. The Payment Services Act defines crypto assets as property with the following traits:

First, they can be used for payments to unspecified parties and can be exchanged for legal currencies such as the Japanese yen or the US dollar. Another key trait is that they are electronically recorded and transferable via networks. They are also explicitly defined as assets independent from legal currencies or assets denominated in legal currencies (like prepaid cards or electronic money).

Generally, you buy or sell crypto assets through crypto exchanges or dealers. These entities play a crucial role in connecting investors with the crypto market. Choosing a reputable provider is the first step toward secure transactions.

Key Risks in Crypto Asset Trading

Crypto asset investing offers the potential for significant returns, but it also involves various risks. The Financial Services Agency (FSA) provides the following important cautions for investors considering crypto assets:

First, it’s essential to recognize that crypto assets are not “legal tender.” This means they are not backed by any government, and their value is determined by market supply and demand. Crypto assets are also subject to extreme price volatility and can experience sharp swings in a short period.

When using a crypto exchange, registration with the FSA is required. Investors must verify that the exchange they use is officially registered. Using unregistered exchanges greatly increases the risk of fraud or asset loss.

Before trading, make sure you receive thorough explanations from the provider and fully understand the transaction details and risks. In recent years, consultations about crypto assets and scam coins have increased, making vigilance against fraud and malicious schemes essential.

While exchanges handling crypto assets are required to be registered with the FSA, scams by unregistered operators are still common. Here are some specific risks associated with crypto asset trading:

1. Risk of Sudden Price Swings

Crypto asset prices can change dramatically in a short time. Political decisions, new regulations, or market-moving news can cause prices to spike or crash within minutes. This high volatility means assets can gain or lose significant value overnight.

For example, when a country announces stricter crypto regulations, the entire market may tumble. Conversely, if a large company announces it will accept crypto assets, prices may surge. To handle this volatility, investors should avoid chasing short-term gains and instead adopt stable, risk-aware strategies.

It’s crucial for investors to monitor factors behind price movements and stay informed about market trends. Avoid emotional decisions—analyze the market rationally.

2. Risks from Scams and Misinformation

As crypto trading has grown, so have scams and fraudulent projects. Investors are often enticed by promises like “Invest now and multiply your money tenfold,” which can impair judgment.

Solicitations may come via social media, ads, or direct messages pushing certain tokens or exchanges. It’s extremely risky to trust such information without verification. Scammers may impersonate celebrities or legitimate companies to deceive investors.

Before investing, always check official project sources, read the white paper, and research the development team’s track record. Projects promising unrealistically high returns require extra caution.

3. Cybersecurity and Hacking Risks

Because crypto assets are digital, robust online security is essential. Asset theft by cyberattack, phishing scams, and the theft of private keys or passwords through fake login screens have become more frequent every year.

Attack methods are becoming more sophisticated, and stolen assets are often unrecoverable. For example, creating fake exchange websites to steal user logins is common, as is malware targeting computers to steal private keys.

Investors should enable two-factor authentication, use strong passwords, and utilize hardware wallets for added protection. Always check the security practices of exchanges and select platforms with a strong reputation.

4. Tax Burden Risks

In Japan, profits from crypto trading are considered miscellaneous income and taxed together with other earnings, such as salary. If you earn over 200,000 yen in annual profits, you must file a tax return, and the tax rate can reach as high as 55% depending on total income.

Profits from each transaction must be recorded, and frequent trading makes recordkeeping and tax calculations complex. Even swapping one crypto asset for another is taxable, so investors conducting complex transactions need to be especially careful.

Neglecting tax obligations can result in additional taxes and fines. Keep accurate transaction records and consult a tax professional if needed.

5. Regulatory Change Risks

As countries implement their own crypto regulations, sudden changes may restrict trading or cause prices to drop sharply. For instance, if a country bans crypto use or trading, or imposes stricter tax rules, the effects can be global.

Regulatory shifts are hard to predict and create uncertainty for investors. If you trade in multiple countries, monitor each nation’s regulatory trends closely.

For example, when China banned crypto trading, the market was severely shaken. To navigate regulatory risk, diversify your investments and stay informed.

6. Risks of Asset Loss from Transfer Errors

With crypto transactions, sending assets to the wrong address is usually irreversible—unlike traditional banking. A minor mistake in an address or tag can send assets to another wallet, often permanently. Double-check all details before transferring assets.

Because blockchain transactions are final, always confirm recipient addresses multiple times and consider sending a small test transfer first.

QR codes make transfers easy, but use only those from trusted sources, as tampered codes can result in loss.

Four Main Causes of Large Losses in Crypto Assets

1. Losses from Leverage Trading

Crypto trading includes spot and leverage trading. Spot trading is straightforward—you buy with your own funds. Leverage trading lets you borrow funds from the exchange to trade beyond your own capital.

For example, with 100,000 yen and 10x leverage, you can trade 1,000,000 yen—but losses are also magnified tenfold. An on-chain analytics expert warns, “Never use more than 2x leverage. Seriously, don’t do it. I’ve never seen anyone succeed long-term using high leverage.”

Failure in leveraged trading can quickly drain your capital, even resulting in debt. Crypto’s volatility makes sudden market swings common, and those who can’t manage risk are likely to suffer heavy losses.

Japanese exchanges limit leverage to protect investors, but risks remain high. Beginners should be especially cautious. Set clear loss limits and avoid emotional trading when using leverage.

2. Risks of Asset Loss at Exchanges

Crypto assets are stored digitally, so hacks of exchanges or personal wallets can result in immediate theft. Japanese exchanges are required by law to separate customer and company assets, so customer funds are usually protected even if the exchange fails.

Foreign exchanges without such segregation are much riskier. Multiple high-profile hacks at overseas exchanges have resulted in major asset losses.

Choosing a domestic exchange is key for risk management. Personally, manage your private keys securely and enable two-factor authentication.

Don’t leave large amounts on exchanges—move long-term holdings offline, such as to hardware wallets, to reduce online risk.

3. Expanding Losses by Not Cutting Losses

Crypto markets are highly volatile, and when prices drop, they may keep falling. Holding assets without cutting losses (known as “bag holding”) can make losses worse.

Minimize losses by calmly selling when a pre-set “stop-loss” is triggered. While this is hard psychologically, it’s critical for steady investing. Many investors hold on, hoping for a rebound, but may end up with worthless assets.

Some crypto assets can surge quickly, but overconcentration in one asset is risky—sudden crashes can wipe out your capital.

To avoid this, diversify across several tokens and monitor the market. Automated trading tools and stop-loss orders can help keep emotions in check.

4. Risks of IEO Investment

In Japan, IEOs (Initial Exchange Offerings) are drawing attention as alternatives to ICOs. An IEO involves a crypto exchange issuing and supporting sales of new tokens to raise funds.

While IEOs are considered less risky than ICOs because the exchange is involved, success is not guaranteed, and some projects have failed to return investor funds. Make sure projects using IEOs are reputable and exchanges conduct thorough checks.

Before joining an IEO, read the project’s white paper and evaluate the business model and technical feasibility. Even if an exchange lists a token, market demand is needed for its value to rise.

Even if you trust the project, start with a small investment. IEOs are high-risk, high-reward—only invest funds you can afford to lose.

Four Major Incidents at Japanese Crypto Exchanges

Japan has seen several major hacks and exchange bankruptcies. Thanks to asset segregation rules, customer funds have often been returned. Here are some key cases:

Major Overseas Exchange Bankruptcy (2022)

In November 2022, the Japanese arm of a major overseas exchange entered bankruptcy after its parent company collapsed. Because Japanese rules required asset segregation, customer funds remained protected throughout bankruptcy.

Withdrawals resumed after a few months, with most funds returned. The company was then acquired by a leading domestic exchange, allowing business to continue. This case highlights the effectiveness of Japanese regulation for customer protection.

Major Domestic Exchange Hack (2018)

In January 2018, a leading Japanese exchange suffered a massive hack, losing about 58 billion yen in crypto assets. Weak security and the use of hot wallets for customer funds were blamed.

This incident led to stronger security and regulatory reforms in Japan, with the FSA increasing oversight. The exchange compensated users and significantly upgraded its security.

This event highlighted the importance of robust security in crypto trading.

Former Major Exchange Bankruptcy (2014)

In 2014, a major exchange lost about 850,000 BTC (worth 48 billion yen at the time) to hackers, resulting in bankruptcy. At the time, customer asset segregation was inadequate, and many funds were unprotected.

Some assets have been recovered through legal action, and restitution is ongoing. This incident underscored the global importance of reliability and security at crypto exchanges.

Afterward, countries worldwide strengthened exchange regulation and emphasized customer protection.

Major Domestic Exchange Hacks (Recent Years)

In recent years, major Japanese exchanges have suffered hacks affecting customer funds. In one case, about 48.2 billion yen in Bitcoin was stolen, but the exchange responded quickly and improved security.

The company announced that, within weeks, it had secured funds for user compensation via group financing. This swift action was crucial for restoring trust.

These incidents show that while Japanese rules tend to protect customer funds, security risks are always present. Investors must check exchange security and maintain their own protections as well.

Crypto Asset Crime Trends

Blockchain analytics reports show that in recent years, the crypto market has started to recover and grow after numerous scandals and price drops. Criminal crypto transactions are declining, with illicit activity dropping to about $24.2 billion.

However, unidentified illicit addresses mean this figure may rise. Fraud and theft are also trending down, with a sharp fall in DeFi platform hacks.

On the other hand, ransomware and darknet market trading have increased, making sanctions-related transactions a larger share of crypto crime. Experts note that many illicit transactions involve sanctioned companies or regions.

Crypto asset anonymity makes them useful for both legal and illicit activity. Regulators are working to improve transparency by strengthening KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements.

Investors should use authorized exchanges and beware of suspicious activity. Understanding crypto technologies is also crucial for protecting your assets.

Types of Investors Most Likely to Fail with Crypto Assets

Investors who repeatedly lose money with crypto assets often share certain behavioral patterns. Here are common types likely to fail in crypto trading:

1. Chasing Quick Profits

Crypto’s appeal often stems from stories of dramatic price surges. Investing in hopes of getting rich quick, without considering fundamentals or long-term potential, is highly risky.

These investors often lose composure and may chase losses with new bets, leading to a cycle of greater losses. A gambling mindset undermines risk management and can result in major losses.

Successful investors take a long-term approach, analyze markets, and invest strategically—not just for quick wins.

2. Believing Hype and Rumors

Social media is full of claims like “This coin will skyrocket,” but believing such hype is a recipe for disaster. Investing on rumors or word-of-mouth, without a sober evaluation, increases the risk of scams and fake projects.

Never invest without verifying information. Always cross-check multiple sources and consult official releases and expert analyses.

Don’t blindly follow celebrities or influencers—analyze and understand information before investing.

3. Failing to Understand Risk

Crypto is far more volatile than other financial assets, so losses can be as extreme as potential gains. Investors who ignore this and invest recklessly tend to lose money quickly.

Sound risk management starts with only investing what you can afford to lose. Diversify and avoid putting everything into one asset.

Invest with surplus funds, never with money needed for living expenses or emergencies. Understanding risk and managing your capital are keys to long-term success.

Does Crypto Have a Future?

Worldwide, relatively few people invest in crypto, so early adopters may benefit. Bitcoin (BTC) has posted significant returns in the past, outperforming major asset classes at times.

Bitcoin ETF approvals, halving events, and monetary policy in large economies have driven prices higher. Despite volatility, Bitcoin has delivered higher long-term returns than traditional stocks or bonds.

Some politicians have proposed adding crypto to national reserves. Policy changes and ETF approvals have enabled companies in the US, Australia, and Europe to invest indirectly in Bitcoin.

Experts note that several countries are preparing to adopt crypto. Developing nations are launching major state-funded Bitcoin mining projects.

This could lead to growing national crypto reserves and large-scale government investment.

However, just because crypto has potential doesn’t mean you should invest without a plan. Monitor the market, understand the risks, and invest systematically.

Five Ways to Manage Risk in Crypto Investing

Crypto assets are attractive, but sound risk management is essential. These five strategies can reduce losses and support disciplined investing:

1. Verify Information

Don’t trust social media or message board claims—always confirm facts on official sites or reliable reports. Read a project’s white paper to see what problems it aims to solve and whether it’s technically feasible.

Cross-check multiple sources for reliability, and consult official statements and expert analysis. Researching the development team’s track record and past successes is also helpful.

2. Start with Spot Investments

Beginners should start with spot investments and avoid leveraged trading. With spot trading, your maximum loss is the amount you invested, making it safer than leverage. Take your time learning the market’s movements.

Leverage trading is high-risk and even experienced investors can suffer major losses. Start with spot trading to get a feel for the market, and consider leverage only after gaining experience.

3. Diversify with Small Allocations

Each crypto asset carries its own risk and reward profile, so basic risk management is to invest small amounts in multiple assets. Avoid concentrating your funds in a single token—spread investments in small percentages to limit the impact of sudden swings.

Diversification is an effective way to reduce portfolio risk. Investing in assets with different characteristics means losses in one may be offset by gains in another.

You can also diversify into traditional assets like stocks and bonds to further reduce risk.

4. Set Loss Limits in Advance

It’s essential to decide in advance when to cut losses in crypto investing. Predetermining your maximum acceptable loss helps you act rationally and prevents losses from spiraling.

When setting your stop-loss, consider your risk tolerance and choose reasonable levels. Stick to your plan and don’t change it based on emotion.

Automated trading tools and stop-loss orders can help you enforce discipline and avoid emotional decisions.

5. Use Domestic Exchanges

Japanese exchanges separate customer funds from company assets, helping protect customers even in bankruptcy. Use exchanges with strong security controls for the safest trading environment.

Foreign exchanges may offer lower fees or more tokens but often lack robust regulation and customer protection. Beginners should prioritize reputable domestic exchanges.

When choosing an exchange, assess security, fees, supported tokens, UI, and pick what works best for you.

Summary: Exercise Caution with Crypto Assets

Crypto assets have drawn attention but involve risks, including price volatility, scams, hacking, and tax obligations. Japan has been the world’s hardest-hit country for major hacks, including those linked to North Korea, and several domestic exchanges have been targeted in recent years.

Investors most likely to lose money are those chasing “get-rich-quick” schemes or believing hype without verification. Careful risk management, information verification, and diversification are essential for future success.

With proper knowledge and risk management, crypto investing offers promising opportunities. However, hasty or unplanned investments can lead to significant losses. Gather information, analyze thoroughly, understand your risk tolerance, and invest systematically for the best chance of success.

FAQ

What Are Crypto Assets (Virtual Currency) and How Do They Work?

Crypto assets are digital currencies based on blockchain technology, managed in a decentralized way without any central administrator. Bitcoin and Ethereum are leading examples, allowing for direct, global payments. They feature low transaction fees and can be traded 24/7, 365 days a year.

What Are the Main Risks in Crypto Investing, and What Losses Can Occur?

Key risks include debt from leveraged trading, capital loss from price crashes, hacking-related asset theft, failing to cut losses, and falling for ICO scams. In extreme cases, losses can exceed your initial investment.

What Are Common Troubles in Crypto Investing, Like Scams, Hacking, and Exchange Bankruptcy?

Risks include phishing, malware hacking, theft of private keys, and exchange bankruptcies. Secure wallet management and using reliable platforms are critical to safety.

What Should Beginners Know Before Starting to Invest in Crypto?

Understand the risks, choose a trusted platform, focus on long-term and diversified investing, and only use surplus funds for careful investment.

How Do Crypto Assets Differ from Traditional Investments Like Stocks and Mutual Funds?

Crypto trades 24/7, is highly volatile, and offers high returns. Stocks have a 400-year track record and greater stability, with dividends and tax-free NISA accounts. FX allows up to 25x leverage for capital efficiency. Crypto is taxed as ordinary income (up to 55%), while stocks/FX are taxed at a flat rate (20.315%). Choose based on your objectives.

What Are Traits and Patterns of Investors Who Suffer Major Losses in Crypto?

Those who lose big often over-invest with leverage, hesitate to cut losses, and neglect security. Unplanned investing, lack of diversification, and falling for ICO scams are also common. Start small, stick to spot trading, and diversify your holdings.

Why Are Crypto Asset Prices So Volatile, and What Is Volatility Risk?

Crypto is highly volatile due to its small market size and sensitivity to supply and demand. Regulatory news, tech developments, and market sentiment can cause sharp moves. Limited liquidity means large trades can trigger big swings.

How Can You Ensure Safety When Investing in Crypto?

Use two-factor authentication, strong passwords, cold wallets for storage, regular security checks, and reliable trading platforms to maximize safety.