Investors should beware: Crypto's risks are structural, its returns are not

Crypto may promise big gains, but weak enforceability, custody risks and fading returns make it a high-risk bet best suited only for "mad money", not long-term goals

My friend Ganesh was recalling his 1983 World Cup experience. India had just finished batting in the final at Lord’s and were all out for 183 against the West Indies. The outlook looked bleak. Ganesh, however, was an optimist. He placed a ₹100 bet (about ₹1,200 today) on India to win at odds of 100 to 1, implying a payout of ₹10,000 (about ₹1,20,000 today). The bet was placed with a bookie. Betting was illegal then, as it still is now. When India pulled off one of the greatest upsets in sporting history, the bookie refused to honour the bet. With the wager itself being illegal, Ganesh had no legal recourse. His winning ticket was worthless. 

Crypto carries a similar risk, driven primarily by weak enforceability. Even if prices move sharply in your favour, you can still lose everything. Assets can be stolen when exchanges fail, as seen in cases such as FTX and WazirX. They can also become irretrievable through self-custody errors — when passwords are forgotten, or access devices are lost — as in widely reported cases such as that of Stefan Thomas, who forgot the password to a hard drive holding Bitcoins worth about $800 million, or James Howells, who accidentally discarded a device containing Bitcoins worth about  $1 billion. 

These risks are compounded in the unregulated “wild west” crypto markets, where price discovery can be distorted by large holders (whales) and sudden stablecoin issuance such as Tether, rather than by fundamentals. In the absence of a regulated delivery-versus-payment mechanism, investors attempting to sell crypto assets online often face elevated fraud risk. Winnings, if any, face hostile tax treatment and the risk of sudden regulatory intervention, like in the adjacent gaming sector. 

Despite these risks, investors are drawn to Bitcoin and other digital assets because of the apparently high returns. At times, those returns have appeared extraordinary, even amid extreme volatility. Bitcoin’s price history includes one-year periods when it lost nearly 75 per cent of its value (year ended November 9, 2022), as well as periods when it multiplied more than 130 times in a single year (year ended July 26, 2011). 

Many investors compare these headline returns with traditional investments such as the Nifty 50 or the S&P 500, without recognising how difficult it is for ordinary investors to actually realise them. Much of Bitcoin’s eye-catching gains came from a specific phase of discovery and monetisation, as it moved from obscurity to global awareness — a phase that may not be repeated. The data already reflects this shift: Average annual returns over the past five years are roughly one-third of those seen in the preceding five-year period. 

Even if future returns are occasionally high, they are unlikely to compensate for the risks going forward. As Bitcoin’s returns compress towards levels closer to traditional investments, its risks do not diminish in tandem. Operational risk, custody failures, legal irreversibility, and the possibility of total loss remain structural features of crypto investing. Once returns normalise, the justification for investment weakens. Crypto does not behave like equities or gold when returns moderate: Downside risks remain open-ended, while the upside increasingly resembles that of conventional assets. Unlike gold, with centuries of near-universal acceptance across cultures and geographies, crypto derives its value entirely from belief and network participation, making it fragile. 

Investments that are non-enforceable, fragile, and have unpredictable long-term returns cannot be used by investors who rely on their portfolios to meet specific goals such as retirement, education, or long-term financial security. If crypto belongs anywhere, it is within discretionary investments — often referred to as “mad money”: capital that can afford very high risks, including the risk of going to zero. 

Truth be told, the estimated 100 million retail crypto investors drawn in by get-rich-quick narratives would do well to remember Ganesh’s story: A winning bet is meaningless without enforceability or recourse. Even setting that aside, going by current data trends, crypto is unlikely to deliver outsized returns and may simply redistribute money from late entrants to early ones.

    

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; 

X: @harshroongta