What are the risks of investing in crypto assets?

All investments carry risk. Investments that are potentially high reward are also often high-risk. Riskier products, like crypto assets, may have the possibility of higher returns, but there’s also a chance you could lose everything. Returns are not guaranteed. 

Before you buy any investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition, it’s important to know your risk tolerance. Risk tolerance is both your ability and willingness to accept an investment outcome, even if it doesn’t produce the expected results. Make sure the amount you investInvest To use money for the purpose of making more money by making an investment. Often…+ read full definition matches your investing risk tolerance and investing goals.

The risks of investing in crypto assets include:

• High volatilityVolatility The rate at which the price of a security increases or decreases for a given…+ read full definition – Crypto assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment,…+ read full definition prices can be very volatile. This means they can increase or decrease in value by large or small amounts, multiple times throughout the day. You risk losing some or all of your money. It is not always clear what causes the value of crypto assets to go up or down.
• Unregistered entities – Some crypto asset trading platforms (CTPs) are not registered and are operating illegally. When you give money to an unregistered CTP you could be giving your money to a fraudulent CTP and in that case, there is typically no way for anyone to get it back. Registered firms are subject to regulatory requirements that aim to protect investors. If you have decided to invest in crypto assets, always use a registered crypto asset trading platform. View the list of crypto asset trading platforms that are registered in Ontario. However, trading on a registered CTP still involves buying and selling risky crypto assets where you could lose some or all of your money.
• Terms and conditions – Carefully review the terms and conditions associated with any crypto asset trading platform or other party that you use to purchase or sell crypto assets.
• Misleading online reviews – What you see online might be written by employees or other people paid by a service provider. Also, information could be outdated or inaccurate by the time you see it.
• Risk of fraud – Some fraudsters capitalize on market interest in crypto assets by creating new scams or rebranding existing scams (such as Ponzi schemes) with crypto language. They are looking for people who are seeking opportunities to get in “on the ground floor” with crypto assets. Learn to spot and avoid fraud.
• Lack of coverage by the Canadian Investor Protection Fund (CIPF) – The eligibility criteria for CIPF protection for securities held in an accountAccount An agreement you make with a financial institution to handle your money. You can set…+ read full definition with an investment dealerInvestment dealer A securities firm that buys and sells a wide range of investments. They are likely…+ read full definition explicitly excludes crypto assets.

There are additional risks for crypto investors, including:

• Losing your private key – If you are directly holding your crypto and you lose your private key, the asset will simply become inaccessible.
• Having your private key stolen – A private key written on a piece of paper or stored in the USB can be stolen physically. And a private key held in a software wallet could be lost/hacked depending on the integrity of the software solution.

There are risks of having your crypto held by the platform. Find out more about how crypto asset trading platforms work.

Crypto assets are generally considered high risk. Purchasing crypto assets is generally a speculative activity as their value and/or liquidityLiquidity Refers to how easy it is to change an investment or asset into cash, without…+ read full definition are highly volatile. You can get exposure to crypto assets through an investment fund rather than investing directly. The elevated risk of crypto remains even if purchased as crypto investment funds through a registered dealer or adviser. Find out more about crypto assets and how they work.

What kind of frauds can involve crypto?

Scammers use many different tactics to try to get your money. Watch out for fraudulent crypto asset trading platforms. It can be difficult to tell the difference between the legitimate crypto asset trading platform and a fraudulent cloned one. The fake sites’ polished look may lure you into sharing personal information, financial information, and crypto wallet passwords that end up in the scammer’s hands.

Crypto is being used in conjunction with many types of investment frauds, including:

• Romance scams – Many scammers work to gain the trustTrust An account set up to hold assets for a beneficiary. A trustee manages the assets…+ read full definition of their victims by initiating contact online. This can take the form of a romance scam. That’s when a fraudster starts a romantic relationship online, perhaps through a dating app or social media. The scammer then escalates to asking for money, often in the form of crypto.
• Long-haul scams – A long-haul scamScam When someone tries to make money by misleading or tricking another person.+ read full definition (sometimes called a pig-butchering scam) starts when the scammer sends a text message or direct message that seems to be accidental. It may look like a message meant for someone else. In reality, the scammer is hoping you will let your guard down and respond. The scammer keeps up conversation with you, and once they have your trust they may ask for money or encourage you to invest in a specific crypto asset trading platform.  
• Grandparent scams (or emergency scam) – The scammer targets a senior and pretends to be their grandchild. Or, they target someone and pretend to be a family member or close friend who needs urgent help. The fraudster pressures the victim by saying they need money right away to get out of a sudden emergency. They may ask for crypto.

The rise of generative AI technology has led to AI voice and face cloning scams becoming more prominent. A common AI scam is when the scammer uses AI to mimic the voice of someone you know or trust. This could be a loved one, who phones you urgently to ask for money or crypto assets. Or you could think you are being contacted by a celebrity encouraging you to invest in crypto. OSCOSC See Ontario Securities Commission.+ read full definition research found AI-enhanced scams pose significantly more risk to investors compared to conventional scams. Find out more about these scams and how to keep your money safe.

Consider these tactics to avoid crypto-related scams:

• Be skeptical about unsolicited calls, text messages, emails, or messages on social media, especially from someone you don’t know. Don’t send personal information.
• Be suspicious of anyone asking you to send money, crypto assets, or encouraging you to invest, especially when you haven’t met them before in person.
• Slow down the conversation. If it seems like someone you know is in trouble, take steps to verify this yourself. Hang up the call and contact them using a number you know is theirs.
• If an investment opportunity seems too good to be true, it probably is. Always check before you invest.

In most cases, when people have had their money taken by a fraudster it’s gone for good. Their money cannot be retrieved. If someone connects with you later promising to help you get your money back, it could be a recovery room scam.

It’s very difficult to get crypto assets back once they have been transferred to another blockchain address outside of your control. Complicating factors include how challenging it is to identify the person(s) in control of blockchain addresses and the use of tools that make tracing the transfer of crypto assets difficult.

Protect yourself by learning about the red flags of crypto fraud. If you think you have been scammed, or have been targeted by a scam, you can contact the OSC using an online form, or call 1-877-785-1555 or email inquiries@osc.gov.on.ca.

How does using a registered crypto asset trading platform help protect you?

Registered crypto asset trading platforms are required to provide disclosure and information to assist you with managing your risks when trading crypto assets on their platform. These can include the following:

• Providing disclosure and information on the overall risks of trading crypto assets.
• Determining if it is appropriate for you to tradeTrade The process where one person or party buys an investment from another.+ read full definition crypto assets prior to onboarding you onto their platform. In many Canadian jurisdictions, including Ontario, , there is an overall limit on how much you can invest in most crypto assets on a platform.
• Evaluating crypto assets available to be offered on their platform.
• Providing crypto asset-specific disclosure and information.

If you are investing  through a registered dealer or advisor in an investment fund that invests in crypto assets, they will  also provide you with disclosure about the investment fund (prospectusProspectus A legal document that sets out the full, true and plain facts you need to…+ read full definition, including an ETF Facts or Funds Facts) and will assess the suitability of the fund for you.