One principle that particularly applies to crypto investments is this: the prospect of high rates of return is always associated with significant risks. When you invest in coins or tokens, you are taking very high risks and may even lose all the money you have invested.

What makes crypto assets so risky

• Price jumps and the volatility (see Glossary) of many crypto assets are extreme. Many triggers may be at work, and it is basically impossible for retail investors to keep track of them all.
• Price increases, such as those seen with bitcoin time and again in the past, often have a self-reinforcing effect, i.e. the rising prices motivate other investors to buy as well. Similarly, crypto asset advertisements often give the misleading impression that unless you hurry, you will miss your chance at the expected profits: it is the “FOMO” effect – the “fear of missing out”. The ensuing investments, in turn, result at first in a further increase in prices, for no substantial reason.
• Falling crypto asset prices do not necessarily mean it is the best time to invest either. It is impossible to predict how prices will continue to develop.
• Should you need to sell, you cannot be sure that you will find a buyer for your crypto assets who is willing to buy right away and at the price you have in mind. For example, in the case of crypto assets where the number or total value of the coins or tokens on the market is relatively low, there might be very few buyers and no trading possibilities.
• IT risks play a major role when it comes to crypto assets. Time and again, a hacker attack occurs that results in investors permanently losing access to their crypto assets.
• If you choose to hold the crypto assets in custody yourself, you risk totally losing access not only if there is a hacker attack, but potentially also as a result of your own carelessness.
• A great deal of the information available about crypto assets is taken from sources which, in terms of data quality and data completeness, are difficult to verify or are simply dubious.
• There are many dubious players at work in this segment.

What you need to do: Ensure you are well informed!

It is not enough to know a thing or two about financial investments in general. You should also have at least a basic understanding of what distributed ledger technology (DLT, see Glossary) is about and how blockchain technology (see Glossary) works.

Without it, you will hardly be able assess the opportunities and risks of an investment in crypto assets.

Even if your bank, broker or investment adviser offers access to crypto assets or recommends them as an asset class, you should be aware of how highly speculative crypto assets are as an asset class. At most, you should consider crypto assets a way of complementing an existing portfolio that is highly diversified, consisting of financial investment products of other asset classes..

Not all crypto assets are the same – find out what each coin or token is about!

There are significant differences between the various types of crypto assets. First, it is important to understand the concept of the coin or token in question: one of the best-known crypto assets is still the bitcoin, which is based on the idea of a substitute currency that is not issued by the state and is limited in supply.

Unlike money that can be printed in unlimited amounts by central banks, and unlike the deposit money created by commercial banks, new bitcoin units are created within a computer network in strict accordance with a fixed mathematical protocol. This process is known as “mining”. The original purpose of bitcoin was to exchange it for goods or services. However, the value of a bitcoin is volatile: it is not guaranteed by any public entities and is only equal to what the other party is willing to pay (or exchange) for it.

The matter is completely different with private stablecoins. The performance of these coins is linked by various stabilising mechanisms to recognised legal tender, such as the euro or the US dollar, or to a basket of assets or physical goods. This should – at least in theory – make it possible to prevent the extreme price fluctuations that are typical of other crypto assets. However, even when you buy stablecoins such as tether, dai or USD Coin, you are taking considerable risks. At the end of the day, you must essentially trust that the stablecoins in question actually carry out the promised hedging transactions and that these actually have the desired effect of stabilising the asset. These activities are not monitored by any supervisory authorities (see Note: BaFin’s scope and limits).

At the same time, other crypto assets are completely different. BaFin recommends that you find out exactly what you actually want to invest in.

Be cautious with certificates and CFDs using crypto assets as the underlying!

There is particularly strong growth in the range of certificates and contracts for difference (CFDs, see Glossary) being offered with crypto assets as the underlying. But this sort of “packaging” does not make the crypto asset investment less risky, it merely eases access to it.

The risks posed by the crypto asset have an impact on the certificate or the CFD as well. What is more, the way some certificates are designed can even increase these risks – for example, if the certificate is leveraged, i.e. it disproportionately reflects the performance of the underlying crypto asset.

In addition, certificates and CFDs usually entail higher costs due to additional product-specific costs, such as for hedging transactions, and certificate-specific profit margins that are included in the pricing. The contract terms are also often unfavourable for the investor – for example, some investment certificate terms set out an option for the issuer to terminate the contract at short notice. In summary, both certificates and CFDs involve additional risks that may be considerable and are sometimes extremely complex. There is also a risk that the company issuing the certificates or CFDs will run into trouble or even become insolvent – this is known as counterparty risk or issuer default risk. Finally, you might have a hard time asserting a claim if the company issuing the certificate or CFD has its registered office in countries outside the European Union or is conducting business without the necessary authorisation.

Be wary of investment tips on social media and from financial coaches!

The internet and social media platforms are, among other things, a playground for all sorts of players – crypto asset developers and providers but also financial influencers (also called “finfluencers”), financial coaches and other self-proclaimed experts. False promises and simple strategies that will supposedly make you rich are widespread and frequent. Coins and tokens are frequently advertised in an aggressive manner. Posts, videos and other forms of content frequently withhold information that prospective investors would need to know.

For investors who are interested in a particular crypto asset, these sources of information present the difficulty of discerning “the wheat from the chaff”. For this reason, BaFin has published this compilation of guidelines for dealing with investment tips found on social media. Advice on the topic of financial coaches can be found here (in German).