Are cryptocurrencies a bad idea!? What risks do cryptocurrencies pose?

What Are Crypto Assets?

Crypto assets are digital assets comprising electronic data that exist only online, without any physical form like cash. Following legal revisions, the term shifted from "virtual currency" to "crypto asset," and this designation is now commonly used.

The defining feature of crypto assets is their ability to be exchanged for legal tender, while not being issued or guaranteed by banks or governments. Their value is entirely dependent on market supply and demand, resulting in highly volatile price swings. This volatility creates opportunities for rapid gains, but also exposes investors to significant risks of loss.

Under the Payment Services Act, crypto assets are defined as property values with the following characteristics: they can be used for payments to unspecified parties, exchanged for legal tender (such as yen or dollars), electronically recorded and transferable via the internet, and they are not legal tender or assets denominated in legal tender (like prepaid cards or electronic money).

Typically, the purchase and conversion of crypto assets is handled through exchanges or sales offices. These providers serve as a crucial bridge between investors and the crypto asset market, and choosing a reputable operator is the first step toward secure transactions.

Key Risks in Crypto Asset Trading

Crypto assets can offer substantial returns, but they also carry a wide array of risks. Financial authorities have issued several important warnings for investors considering crypto asset investments.

First, investors must understand that crypto assets are not "legal tender." This means their value is not guaranteed by any government, and instead depends solely on the trust and supply-demand dynamics of market participants. Crypto asset prices are extremely volatile, and unpredictable fluctuations can cause dramatic shifts in asset values.

When using a crypto asset exchange, it is essential to confirm the operator is properly registered. Trading with unregistered entities significantly increases the risk of fraud and asset loss. Before trading, obtain thorough explanations from the provider and fully understand the transaction details and associated risks.

Recently, reports regarding crypto assets and fraudulent coins have been on the rise. Remain vigilant against enticing claims like "guaranteed profits" or "exclusive opportunities," and be wary of scams and malicious business schemes.

Risks Associated with Crypto Asset Trading

1. Sudden Price Fluctuation Risk

The most distinctive trait of the crypto asset market is its extreme price volatility. Compared to stocks and foreign exchange markets, crypto asset prices often move by several tens of percent—or even multiples—in a short period.

Political decisions, new regulations, major corporate entries or exits, and statements from influential figures can all instantly affect prices. Such factors mean assets can rise or fall dramatically overnight. Regulation news can halve prices in a few hours, while announcements from large companies can cause rapid surges.

This level of volatility imposes significant psychological pressure, making rational decision-making difficult. Inexperienced investors in particular may struggle to respond, increasing the risk of losses from emotional trading.

2. Risks of Fraudulent Projects and Misinformation

With the growth of the crypto asset market, fraudulent projects and false information have become increasingly common. Scams often lure investors with promises like "make dozens of times your money" or "exclusive investment opportunities," encouraging investment in projects with no real substance.

Fake success stories and fabricated profit reports circulate widely online and on social media, causing more investors to suffer losses. Fraudulent accounts impersonating celebrities or experts are also prevalent, making it crucial to assess the credibility of information.

When making investment decisions, carefully examine the substance of the project, the development team's credibility, and the technical feasibility. Be especially cautious about overly optimistic claims or deals offering guaranteed profits.

3. Cybersecurity Risks

As digital assets, crypto assets require robust online security measures. Incidents include asset theft via cyberattacks, phishing scams, and theft of private keys or passwords through fake login screens.

Major exchanges have experienced large-scale hacks resulting in significant asset losses. Individual wallets are increasingly targeted, and investors with weak security practices are particularly vulnerable.

Implementing basic security measures—such as two-factor authentication, strong passwords, and strict private key management—is essential. Daily vigilance is also critical; avoid suspicious emails and links, and always log in from official websites.

4. Tax Liability Risks

Japanese tax regulations for crypto asset transactions can place a considerable burden on investors. Profits from crypto asset trading are classified as miscellaneous income and taxed together with other earnings under a comprehensive system.

Special attention is needed if annual profits exceed ¥200,000, as this triggers a requirement for a tax return. The progressive tax rate can reach up to 55% (income tax 45% + resident tax 10%), far exceeding the roughly 20% rate for stock investment.

Exchanging crypto assets or using them to purchase goods is also taxable, requiring profit calculations and records for each transaction. Neglecting these complex tax obligations can result in substantial back taxes or penalties later.

5. Regulatory Change Risks

The crypto asset market is still relatively new, with each country developing its own regulatory approach. Sudden changes can restrict trading or trigger sharp drops in currency prices.

Moves to strengthen regulation are underway worldwide, with new rules for anti-money laundering, investor protection, and financial system stability. Regulatory changes can significantly impact the market, leading to rapid price swings and shifts in the trading environment.

Investors must monitor regulatory trends both domestically and internationally, and understand their potential impact on the market.

6. Asset Loss Due to Transfer Mistakes

Crypto asset transfers differ greatly from traditional bank transactions. The key point is that once a transfer is executed, it cannot generally be reversed.

A single incorrect character in the recipient address can send assets to the wrong destination, making recovery nearly impossible. Transferring to an unsupported network can also result in asset loss. Such mistakes are common among beginners, with cases of total asset loss from a single error.

Always double-check addresses and test transfers with small amounts to minimize risk.

Four Causes of Significant Losses in Crypto Assets

1. Losses from Leveraged Trading

Crypto asset trading includes spot and leveraged trading. Spot trading involves buying within your available funds, while leveraged trading allows borrowing funds from the exchange to trade larger amounts.

Leveraged trading enables larger profits with less capital, but losses can escalate just as quickly. For example, ¥100,000 with 10x leverage allows a ¥1 million trade, but a 10% price drop wipes out the entire principal.

Top crypto asset analysts warn that very few investors succeed long-term using high leverage, and most suffer major losses after short-term gains, exiting the market.

Leveraged trading failures can not only deplete capital, but also lead to debt. With unpredictable price movements and frequent market swings, inadequate risk management can result in devastating losses.

During sudden volatility, forced settlements ("stop-loss cuts") can cause unexpected losses. Trading with leverage without fully understanding these risks is extremely dangerous.

2. Risks of Asset Outflow from Exchanges

Since crypto assets are stored digitally, hacking exchanges or personal wallets can result in instant asset theft. Multiple major exchanges have suffered cyberattacks resulting in substantial asset losses.

Japanese exchanges are legally required to segregate customer assets from company assets, ensuring customer protection in case of bankruptcy. In past incidents, assets were returned to customers in most cases.

Foreign exchanges not subject to segregation often lack such protection, increasing asset outflow risk. Some have abruptly ceased operations, leaving customers without returned assets.

Choosing a registered domestic exchange is crucial for risk mitigation. It's also recommended to transfer large holdings to self-managed wallets for diversified management rather than leaving them on exchanges.

Individually, strict private key management, two-factor authentication, and regular password changes are necessary security precautions.

3. Failing to Cut Losses and Expanding Losses

The intense volatility of the crypto asset market complicates proper loss-cutting decisions. Holding assets in hopes of recovery after a drop—so-called "locked-in" positions—is the most common failure pattern, leading to greater losses.

Assets in a downward trend may continue falling without recovery, especially for projects lacking substance or currencies with little demand. Psychological resistance to realizing losses causes investors to hold on, but this only amplifies losses.

To minimize losses, set a clear stop-loss level before investing and sell mechanically, without emotion, when hit. For example, a rule like "sell if the price drops 20% from purchase" can prevent catastrophic losses.

While some assets surge rapidly and certain investors make large gains, investing heavily in a single asset is highly risky. Sudden crashes can wipe out value, so diversify across currencies and monitor the market to reduce risk.

4. IEO Investment Risks

IEOs (Initial Exchange Offerings) have gained attention in Japan as a fundraising method replacing ICOs. In an IEO, an exchange supports the issuance and sale of new tokens for project funding.

Exchanges conduct certain reviews for IEOs, which are thought to reduce fraud risk compared to ICOs. However, passing a review does not guarantee project success.

Some IEO-funded projects have failed to deliver expected services or products, leading to sharp token declines or project collapse. Investors may lose their funds and tokens may become nearly worthless.

When considering IEO investments, assess project feasibility, the development team's experience and track record, and market demand. Also, check how rigorously the exchange reviews projects and examine past IEO success rates.

Four Major Incidents at Japanese Crypto Asset Exchanges

Japan has seen multiple crypto asset-related incidents. Asset segregation regulations have often enabled customer asset recovery. Below are representative cases and responses.

Major Overseas Exchange Bankruptcy

One case involved a Japanese subsidiary entering bankruptcy after its parent company's collapse. Thanks to asset segregation under Japanese law, customer assets remained protected, withdrawals resumed quickly, and most assets were returned.

This highlighted the effectiveness of strict Japanese regulations in customer protection. Even when a parent company fails overseas, domestic customer assets are separately managed, minimizing impact.

Major Domestic Exchange Hack (2018)

A major Japanese exchange suffered a large-scale hack leaking about ¥58 billion in assets. The incident stemmed from inadequate security, particularly the use of online ("hot") wallets for customer asset management.

The exchange compensated customers and significantly upgraded security. Industry-wide, security standards were revised and the importance of offline ("cold") wallet management was reaffirmed.

Early Large Exchange Bankruptcy

In the early days of crypto assets, one of the world's largest exchanges was hacked, losing about 850,000 BTC (worth ¥48 billion at the time) and going bankrupt.

Due to insufficient asset segregation, most assets were unprotected. Some were recovered through lengthy court proceedings, with returns ongoing. This incident raised industry awareness of security and asset management's importance.

Recent Domestic Exchange Hack

Recently, a major Japanese exchange was hacked, leading to a ¥48.2 billion Bitcoin outflow. The exchange responded swiftly, further strengthening security.

After the incident, group companies quickly raised funds to compensate users. This prompt response helped maintain customer trust and demonstrated strong crisis management by Japanese exchanges.

Trends in Crypto Asset Crime

Blockchain analytics firms report the crypto asset market is entering a growth phase, rebounding from past incidents and price declines. Crime-related transactions are decreasing, with a sharp drop in illicit activity.

Fraud and theft are also falling, especially DeFi (decentralized finance) hacks. This is credited to improved DeFi protocol security and higher industry-wide security awareness.

However, ransomware attacks and illegal darknet market transactions are increasing. Ransomware often demands crypto asset payments, exploiting anonymity. Transactions involving sanctioned entities or regions remain high, underscoring the need for stronger international regulation.

As the market matures, some crimes are declining, but new tactics are emerging, requiring ongoing vigilance.

Investor Types Prone to Crypto Asset Losses

Investors who frequently lose money in crypto assets often share specific traits. If any of the following apply, exercise extra caution.

1. Chasing Short-Term "Miracle Wins"

Crypto asset news often features dramatic price surges, drawing people hoping for quick profits—but this carries a high risk of failure.

This type invests based on price expectations, without considering the asset's fundamentals or long-term prospects. As a result, they lose composure and may gamble on the next investment after a loss, falling into a negative cycle.

Using living expenses or borrowed funds is extremely dangerous. Crypto asset investing should be limited to surplus funds, and only within amounts that will not affect daily life. The desire for a "miracle win" makes it difficult to maintain discipline, increasing the risk of financial trouble.

2. Taking Information at Face Value

Social media and the web are full of claims like "this coin will skyrocket" or "insider picks." Investors who fail to critically examine sources and simply believe such claims are prone to failure.

Making decisions based on rumors or reviews without checking the source's credibility or intentions greatly increases the risk of scams or fake projects. Pay close attention to information from anonymous or unverified sources.

When making investment decisions, gather information from multiple trusted sources and reference official project data or independent analyses. Consider the timing and context of information, and avoid being misled by outdated or biased content.

3. Not Understanding Risk Management

The crypto asset market is far more volatile than stocks or bonds. Investors who underestimate the risks of large losses alongside big gains tend to lose assets quickly.

This type often fails to assess risk tolerance, invests recklessly, uses excessive leverage, or ignores diversification—putting all assets in one currency and neglecting basic risk management.

Proper risk management requires understanding your asset situation, investment experience, and risk tolerance, and developing an appropriate strategy. Psychological resilience to market swings is also essential.

Does Crypto Asset Have Future Potential?

Currently, only about 5% of the global population is estimated to invest in crypto assets, indicating the market is still in its early growth stage. Early entry can offer advantages.

Historical data shows major crypto assets have delivered high long-term returns. Bitcoin, for example, has averaged several hundred percent annually over the past decade, far outpacing traditional investments.

Institutional participation is accelerating, with major financial institutions and corporations adding crypto assets to their portfolios. Crypto asset-based financial products are also increasing, enabling access for investors previously unable to invest directly.

Political developments influence the market. Some nations treat crypto assets as strategic assets, potentially driving prices higher. Central bank digital currencies (CBDCs) are under development, raising interest in digital assets overall.

Technological applications of blockchain are expanding beyond finance into supply chain management, digital identity, decentralized apps, and more—boosting the utility and value of crypto assets.

Developing countries are preparing for national-level crypto asset adoption. For nations with unstable currencies or underdeveloped financial systems, crypto assets may serve as new infrastructure.

However, future potential depends on regulatory frameworks, technical challenges, and market maturity. Evaluate these factors comprehensively and make decisions with a long-term perspective.

Five Principles for Managing Crypto Asset Investment Risk

To enjoy the benefits of crypto asset investing while managing risk, understand and apply these five fundamental principles.

1. Verify Information

Accepting information from social media or forums without scrutiny is highly risky. Always validate key investment data through multiple trusted sources and confirm authenticity.

Read official project white papers thoroughly to understand the challenges addressed, technology used, feasibility, and competitive differentiation.

Check the development team's background and track record, and be cautious with anonymous or unproven teams.

Third-party reports and expert opinions can help, but use them as one data point, not as gospel. Investing time in research and analysis is crucial for success.

2. Start with Spot Investments

Beginners should avoid leveraged trading and begin with spot investments. With spot investing, losses are limited to the invested amount.

Leveraged trading carries high risks, even for experienced investors, and sudden volatility can cause unexpected losses. For beginners, leverage unnecessarily increases risk.

Use spot investing to learn market behavior, assess your risk tolerance, and gradually explore other methods as needed. This stepwise approach builds long-term success.

3. Diversify Investments in Small Percentages

The crypto asset market includes thousands of currencies, each with unique risk and return profiles. Putting all funds in a single currency is extremely risky.

Spread assets across multiple currencies to minimize the impact of any one decline. For example, allocate most to major coins like Bitcoin or Ethereum, and invest small amounts in promising altcoins.

Keep high-risk coin allocations to a few percent, and focus on stable major coins for balance.

Combine crypto assets with stocks or bonds to further diversify risk.

4. Set a Clear Loss Limit

Avoid emotional decisions by establishing stop-loss rules before investing. For example, "sell if the price drops 20% from purchase," and adhere strictly to prevent losses from escalating.

Set stop-loss lines based on your risk tolerance and goals, and execute them mechanically. Hoping for recovery often results in greater losses.

Set rules for profit-taking as well; when your target is reached, sell part or all to secure gains and avoid losing profits to subsequent declines.

5. Use Domestic Exchanges

Japanese exchanges operate under strict regulation and require asset segregation, protecting customer assets even in bankruptcy.

Some foreign exchanges lack such protection, have lax regulation, or insufficient security. Japanese-language support may also be limited, complicating issue resolution.

When choosing a domestic exchange, consider registration status, security, past incidents, fee structures, and available currencies.

Do not leave large sums on exchanges; transfer long-term holdings to hardware wallets for greater security.

Conclusion: Approach Crypto Assets with Care

Crypto assets offer new investment opportunities, but serious risks such as price volatility, fraud, hacking, and tax burdens remain. Major hacks and bankruptcies have occurred both domestically and internationally, affecting many investors.

Japan is a primary target for crypto asset cyberattacks, and domestic exchanges have suffered multiple incidents. Strict regulations have helped protect and return customer assets in most cases.

Investors prone to failure include those seeking quick wins, those who believe information uncritically, and those who neglect risk management. If you identify with these traits, reassess your investment strategy before starting.

Crypto assets do have future potential. Institutional adoption, technological progress, and regulatory improvements are maturing the market. Early entry can be advantageous, but only with proper risk management.

Before investing, gather information from reliable sources, understand project fundamentals, and make informed decisions. Start with spot investments, diversify, set stop-loss rules, use registered domestic exchanges, and practice basic risk management.

With the right knowledge and risk management, crypto asset investing can be a viable path to wealth, but careless decisions or unrealistic expectations can lead to major losses. Understand the risks and mitigation strategies outlined here, and make careful choices suited to your situation—the first step toward success.

FAQ

What Risks Are Involved in Crypto Asset (Virtual Currency) Investing?

Risks include extreme price volatility, fraud and scams, hacking, high tax rates, and personal liability. Since there is no central authority, compensation may not be available in case of issues.

What Are Common Traits and Failure Patterns of Those Who Suffer Major Losses in Crypto Assets?

Excessive leveraged trading, holding losing positions without cutting losses, weak security practices, unplanned investments in high-risk products like ICOs, and trading without proper research or planning are typical causes of major losses.

What Should You Know Before Starting to Invest in Crypto Assets?

Understand the risks and invest only surplus funds. Choose reliable platforms, focus on long-term and diversified strategies, and proceed calmly without panicking over market swings.

What Are the Risks of Fraud and Hacking in Crypto Assets?

Crypto assets are highly volatile and exposed to fraud and hacking risks. Use registered providers, enable two-factor authentication, watch for scams, and confirm with the Financial Services Agency.

Why Is Crypto Asset Price Volatility So High?

Crypto assets are lightly regulated, dominated by speculative trading, and highly reactive to news, resulting in extreme volatility. Annual fluctuation rates often exceed 50–100%, far outpacing stocks and gold.

What Safety Measures Can Help Protect Your Funds When Investing in Crypto Assets?

Set strong passwords, enable two-factor authentication, beware of phishing scams, and keep funds in secure wallets. Avoid public Wi-Fi and regularly review your security settings.