Schwab continues to monitor the emerging cryptocurrency markets, which offer a potentially lucrative opportunity for active traders. However, investors should remain cautious and consider cryptocurrencies as speculative assets that are best traded with money outside of a traditional long-term portfolio.

Understanding Crypto Risks and Rewards involves virtual or digital assets that use blockchain technology. They don’t have all the same qualities as real or fiat currencies, such as being backed by governments or central banks, and holdings in online “wallets” don’t enjoy the same level of protections as U.S. bank accounts or stocks. This makes them highly speculative and their value can fluctuate wildly over short periods of time, often led by media hype and investor opinion. And if you invest in crypto-related products, you could face substantial risks like illiquidity and fraud.

Balancing Risk and Reward in Crypto Investments

In addition, cryptocurrencies are sometimes used for illicit transactions (e.g., ransomware payments, financing illegal activities) that can expose businesses to significant sanctions, fines and reputational damage. And security risks are a concern as hackers target crypto wallets and exchanges.

Traders can help mitigate these risks by following basic trading principles, including using the proper risk-to-reward ratio for their trades. This metric, defined as the potential loss on a trade, determined by setting a stop-loss order, compared to the potential gain, determined by setting a take-profit target, helps traders determine whether an investment is worth the risk. This is especially important when trading volatile assets, such as cryptocurrencies.