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Cryptocurrency may be a virtual currency, but its value can never go negative. In short: The value of a cryptocurrency cannot be worth less than $0.
That said, the crypto market is volatile, and it’s possible for investors themselves to lose considerable amounts of money, especially if they use higher-risk strategies such as short selling and margin trading, as these can potentially result in significant losses as well as gains.
So, can cryptocurrency go negative? Not in the technical sense, but an investor’s account could end up in the red if they don’t fully understand the risks of this fast-moving market. Keep reading to learn more.
Can Crypto Ever Go Negative? The Answer May Surprise You
Cryptocurrency trading is one of the more volatile investment strategies, which is part of the attraction for high-risk traders. The largely unregulated crypto market can manifest huge profits for some but cause severe losses for others.
As an example: In 2021 alone, Bitcoin (BTC) saw a low of about $29,000 in July and reached a record high of about $67,000 in November. By January of 2022, however, BTC had plunged to about $35,000, off nearly 50% from the peak in November 2021. While that’s just one example of how volatile a single cryptocurrency can be, this type of fluctuation is common among most forms of crypto.
Is it possible then that crypto can go negative? The short answer is no, though your investment account can.
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The Short Answer
As mentioned earlier, no asset, virtual or not, can ever be worth less than zero. That includes property, security, or currency. So, the lowest price crypto can ever reach is $0.
However, that doesn’t guarantee a Bitcoin investor will not see losses from investing in cryptocurrency.
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The Long Answer
The long answer is more complex. It is possible for an investor’s crypto account to fall into negative territory, especially if they open a short position or trade using a margin account — two strategies that involve leverage, i.e. debt.
Using leverage means an investor opens a margin account and borrows funds from their broker-dealer to buy securities in the hope that the price will go up (or down, in the case of short selling), and they will make a profit.
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By using margin funds, loaned to them at a certain interest rate, investors can typically purchase greater amounts of a security than they could using only cash. Thus, if the security appreciates beyond the purchase price (and the amount of interest charged in the margin account), the investor could see a substantial gain, pay back what they owe, and pocket the rest.
Here’s the rub, though: If the price of the asset drops below the purchase price, the investor would be on the hook for all the money they lost plus the interest owed on the money they borrowed. (More on margin trading below.)
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Can You Lose Cryptocurrency Investments?
Unfortunately, yes, you can lose cryptocurrency — but not because a coin’s value can sink so low that it’s underwater. Rather, cryptocurrencies themselves are vulnerable to being hacked, and sometimes crypto literally gets lost, thanks to human error.
There are two factors to understand here: how the blockchain works and how crypto wallets work.
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What Happens When the Blockchain Is Hacked?
Blockchain technology, which emerged with the launch of Bitcoin in 2009, is a decentralized web of computers that essentially allows for the creation and trading of various types of crypto. Typically, each form of crypto (e.g. Bitcoin, Ether, Dogecoin, Ada, Polka Dot) exists on its own blockchain.
Because most cryptocurrencies are decentralized, they don’t require a third party like a bank or government agency to verify buying, selling, crypto payments, and other transactions. Also, most forms of cryptocurrency are not regulated by the government or a body like the Securities and Exchange Commission (SEC), although that may change.
In effect, it’s the people who own the crypto who monitor the platforms and each other.
That kind of self-policing works well, until it doesn’t — and there have been some well-known instances where a blockchain or crypto exchange was penetrated by hackers who stole millions of coins. In some cases, the hackers managed to fraudulently “mint” additional coins (sort of like digital counterfeit).
Unfortunately, individual traders can’t do much about these vulnerabilities, but crypto platforms continue to evolve new ways to keep investors’ crypto secure.
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You Can Lose Crypto When You Lose Your Keys
Then there’s the unfortunate impact of human error.
When you buy crypto you become the sole owner of the cryptographic string of numbers and letters that comprise the private key that gives you, and only you, access to your cryptocurrency. You cannot buy, sell, or trade your crypto without the private keys.
Unfortunately, some people have simply lost the private keys to their own crypto, effectively losing all their coins. A study done in January 2021, for example, found that about 20% of the existing 18.5 million Bitcoin has been lost or is inaccessible.
So, while the unregulated nature of crypto platforms and exchanges may allow for some independence and anonymity, the downside is that there are fewer legal guardrails to protect ordinary investors. The cash in your traditional checking or savings account is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, but that’s not always the case with crypto exchanges.
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Some crypto exchanges may store your crypto offline to keep it secure. Others may offer FDIC protection for the cash in your custodial account, up to $250,000, but terms vary from exchange to exchange. Often it falls to investors to suss out how secure their crypto is — and decide how much risk they’re comfortable with. According to Cryptonews.com, exchanges lose $2.7 million every day on average.
Some exchanges are more secure than others. The better ones use valid HTTPS certificates, secure passwords with two-factor authentication (2FA), cold storage where crypto is secured offline rather than held in a hot wallet accessible on a computer or mobile device, and whitelisted IP and withdrawal addresses so that funds can only be withdrawn by approved addresses.
The best line of defense against hackers is to use a private crypto wallet and to back it up.
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Can You Lose More Than You Put In?
We’ve established that the value of crypto can never fall below zero. But investors can lose money on crypto investments and see a negative balance depending on their investing strategy. How? By over-leveraging. Two situations where this can occur are short selling and buying on margin.
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Margin and Leverage Risks and Possible Benefits
To margin trade, a crypto user will put down a certain percentage of the margin position they want to open and borrow money from an exchange to cover the rest. (Depending on the crypto exchange, margin trading may or may not be allowed, and margin terms may vary.)
If the price of the security rises, the trader makes money. However, if the price drops, and the exchange requires a certain borrowing ratio or margin balance, the buyer will have to deposit more money. In some cases, the exchange may automatically sell the investor’s assets to cover the difference — this is known as a margin call.
The United States is cracking down on margin trading so that only qualified investors with plenty of capital can access these accounts. Investors also have the option of limiting their losses with crypto futures contracts. Futures contracts can protect short and long positions because speculators can also buy the opposite option contract.
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Short Selling Crypto: Risks and Possible Benefits
To short sell, investors borrow crypto at current market price, sell it, and then hope to buy it back at a lower price, making a profit. Of course, if the price of the asset being sold short continues to rise, the potential loss is unlimited. The higher the price goes, the more the investor will lose. As with any high-risk strategy, there are also benefits to shorting crypto.
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Tips on Preventing Crypto Losses
The crypto market is volatile without a doubt. So, the wise crypto investor does what they can to reduce exposure and minimize losses. Three ways to do this are:
- Realize losses to offset gains. (Note that the wash sale rule does not apply to crypto, which makes this strategy easier.)
- Set up a trading strategy with entry and exit points and stick to it. Some investors use stop losses as a fundamental risk mitigator.
- Lastly, crypto futures trading allows traders to use leverage to hedge the market.
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1. Losses and Taxes
Crypto gains are taxable, but the taxes that apply depend on whether the gains are treated as investment gains, income or profit from the sale of a property.
But there are some rules that can help with losses. Losses and gains in the crypto market can be substantial. But there is an upside to the downside — as of early February 2022, the wash sale rule doesn’t apply to crypto (although there is a movement to change that, so be sure to check if you think wash sale terms may apply to you).
According to the SEC, a wash sale occurs when a trader sells or trades a security at a loss and buys a “substantially identical” stock or security, or acquires a contract or option to do so, within 30 days.
The loophole is that crypto is not technically considered a “security,” it’s considered property. Crypto investors can sell crypto for a loss, use that loss to reduce or eliminate capital gains tax on winning investments, and also buy back the crypto they sold and avoid missing out on a subsequent rebound in price.
Let’s say a Bitcoin investor incurs a $20,000 loss in one year but then sells another crypto and realizes a $20,000 gain. The Bitcoin loss would cancel the capital gain, and the investor could also buy up Bitcoin at its low price. A stock investor who incurred a loss could not buy back stock they had sold in the same way because of the wash sale rule.
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2. Stop Losses
Many traders use stop loss orders to reduce their exposure. A stop loss order allows the investor to automatically buy or sell once the price of an asset, like Bitcoin, touches a specified price, i.e. the stop price. This limits losses or locks in profits on a long or short position.
For example, setting a stop-loss order for 15% below the buy price would limit losses to 15%. The advantage of stop-loss orders is that they can prevent investors from making decisions based on emotion. The best traders choose entry and exit points and stick to their plan.
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Crypto futures trading is another way to limit losses in cryptocurrency trading. Similar to commodity futures trading, the trader does not need to own the crypto assets. Rather, the trader only takes risks on the price changes.
For example, let’s say a trader enters a Bitcoin futures position at $50,000 each. They take a long position. When the futures contract expires, if the Bitcoin futures price settles at $55,000 for each contract, the trader receives a profit of $5,000 from the exchange.
Crypto traders also use leverage in crypto futures trading, which is capital efficient. For example, one Bitcoin might cost $50,000. A futures contract would allow a trader to open a position with only a fraction of that cost, perhaps $5,000 worth of Bitcoin.
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Alternatives to Crypto Investing
Crypto is probably the most volatile asset there is, and few alternatives have the same level of risk. Thus, finding ways to diversify your holdings may help manage risk.
The obvious alternatives to crypto investing are stocks, bonds and precious metals. ETFs and mutual funds may also offer some options for diversification. Fine art, jewelry and other collectibles are an example of alternative investments for those with a talent for selecting those kinds of valuables.
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While cryptocurrency can never go negative in the true sense, it is possible that traders can lose money, particularly if they use strategies like margin trading or futures contracts.
Wise investors can choose risk mitigation strategies like stop losses and hedging.
Lastly, bear in mind that cryptocurrency is largely an unregulated asset class, and the ways to make money using crypto are still evolving. Still, fake crypto schemes are rife. According to the Federal Trade Commission, from October 2020 to May 2021, some 7,000 people reported combined losses of more than $80 million total, with an average loss of $1,900. So, buyer beware applies here.
Investors can protect themselves by signing up with a reputable trading platform and explore potentially profitable ways to invest in crypto.
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