But this risk is by no means limited to price volatility.
If the company holding your crypto assets declares bankruptcy or is otherwise unable to meet its financial obligations, you might be out of luck. While your traditional savings and investment accounts can never be 100% safe in the event of your institution’s insolvency, your traditional bank and brokerage and your 401(k) plan offer greater levels of guaranteed protections for your money than a crypto account.
Still, in bankruptcy, “a judge will rely on what the law says, not what you put in your retail user agreement,” said bankruptcy attorney Alan Rosenberg. But, he added, “it is impossible to predict what would happen [because] the case law is very limited.”
Indeed, the legal, tax and regulatory frameworks for digital assets – not to mention the legal definitions of what a specific cryptocurrency is – are still being worked out. They are not legal tender and are not always considered securities.
That’s partly why they don’t have the same safeguards as more traditional financial accounts.
So read the legal fine print before buying, selling or storing digital assets with any company that facilitates crypto trading to see what protections they offer.
Since Coinbase is publicly traded and therefore needs to be more transparent than private companies, its promises and guarantees are likely to be some of the best offered to those looking to invest in crypto.
For investments and savings in which you would like to have a greater sense of security, here are some of the main protections offered by traditional financial accounts.
Bank accounts and credit unions
If you have a checking or savings account, money market deposit account, or certificates of deposit with a bank or credit union, make sure the institution has deposit insurance .
Up to half of this amount can be used to protect your account cash associated with your securities – for example, if you just sold stocks and left the proceeds in your account at the brokerage.
In addition to SIPC insurance, a brokerage may provide additional protection for its clients through private insurers like Lloyd’s of London.
If your employer goes bankrupt, legally your 401(k) money cannot be treated as business assets by a bankruptcy court.