Cryptocurrency is an emerging alternative asset class that tends to be more volatile than stock market investments. There is also a lot of debate on the long-term viability of crypto as an investment vehicle. Some enthusiasts believe it’s the future of money and could someday replace fiat currency (aka government-issued currency), while others are less bullish on its long-term prospects and believe it to be a risky endeavor.
Many investors want to know if they can count on cryptocurrency as a safe place to put their money, both in terms of return on investment as well as security of their personal data. Doing research on any potential crypto investment and then taking recommended steps to protect your investment can offer you peace of mind.
TL;DR
- Cryptocurrency came on the scene with the launch of Bitcoin in 2009. Thousands of other cryptocurrencies known as “altcoins” have appeared since.
- Investing in crypto assets might mean that you believe these assets could rise in value over time. Some crypto investors do not necessarily believe that cryptocurrencies will replace fiat, but they do think the demand for crypto assets will go up.
- Crypto enthusiasts praise the decentralized nature of blockchain technology, meaning it’s not controlled by an entity such as the government.
- Cryptocurrencies are historically volatile in price, making them riskier than traditional investments.
- Altcoins tend to be higher-risk investments than Bitcoin, but this also means they have the potential to produce greater rewards. There are ways to make your investment safer to reap the most benefits.
A brief history of cryptocurrency
Bitcoin, the first and most widely-used cryptocurrency, was launched in 2009. All cryptocurrencies are completely digital, with no physical product. Some are used for online payments, but to date there are not many places that accept cryptos as currency. That said, more and more companies are adding compatibility with Bitcoin and other cryptocurrencies (even Starbucks accepts Bitcoin through the Bakkt app).
Most cryptocurrencies are stored in a transaction ledger using blockchain technology. All users of the blockchain have control, rather than a financial entity such as a large bank owning all of the assets and controlling them.
Blockchain technology offers quite a bit of security since data cannot be overwritten once established, making data manipulation fairly difficult.
The security debate around cryptocurrency
Some financial analysts don’t recommend investing in cryptocurrency because of security issues. Even though in some ways crypto can be more secure than fiat currency, cryptocurrencies have been vulnerable to significant attacks.Some reports say cryptocurrency crimes have increased an average of 312% annually since 2016, though other research suggests otherwise.
Watch-outs for crypto investors
The following are some things that crypto investors or those interested in investing may want to know about as they do their research:
- Scam initial coin offering: When a fake cryptocurrency is offered to investors pre-market, causing investors to lose all of their money on a nonexistent product.
- Crypto pump-and-dump schemes: When investors buy a cryptocurrency that has a low value, usually a new altcoin, convincing more investors to buy in before the original investors sell at the artificially increased price.
- Unsolicited offers to buy crypto: Don’t respond if you receive a message urging you to purchase crypto; do your research and find a reputable exchange. In addition, any message or social media post requiring you to pay in cryptocurrency is a scam, per the FTC.
- Crypto theft: Cryptocurrencies can be hacked, enabling thieves to steal your funds from your crypto wallet.
Is cryptocurrency safe to use?
When dealing with cryptocurrency you must take steps to ensure your safety as you would with any digital or physical financial accounts.
Blockchain can help protect users from anyone tampering with their data. It can also help prevent identity theft and protect infrastructure.
Remember that prices of Bitcoin and other cryptocurrencies are typically volatile. Most experts warn that, in general, you should only invest as much money in cryptocurrency as you can afford to lose. And while cryptocurrencies, on the whole, tend to be more volatile than other types of investments, there are nuances when looking at different cryptos, as well. Bitcoin, for example, might be less volatile than a small altcoin that is entering the scene and/or has reached “memecoin” status. This is where people seek to drive interest in a smaller crypto asset to push the price higher.
Billionaire entrepreneur Mark Cuban found this to be true in 2021, when he revealed that he’d been invested in a DeFi token that crashed to zero in a single day. Cuban recommends conducting good research before investing in altcoins or any cryptocurrency to make a calculated decision.
Another safety issue with cryptocurrency is that it isn’t backed or insured by any federal entity, so if a company storing your crypto is hacked, you have no recourse to recover your money. This is different than regulated investment spaces where your investments are backed by the FDIC or SIPC.
Protecting your cryptocurrency investments
1: What to know about cryptocurrency wallets
One of the first lines of defense against cryptocurrency theft and other scams is the way investors store their cryptocurrencies. Cryptocurrency must be stored in a digital wallet, and most experts recommend using a cold wallet, or an offline wallet not available on the internet.
A hot wallet is an online wallet, and if a user doesn’t take precautions, it can leave them vulnerable to hacking and theft. Experts recommend using hot wallets only for small amounts of crypto, and sticking with cold wallets for larger quantities.
When you store the majority of your cryptocurrency in a cold wallet, you can store your private key and other information offline, where it’s at less risk of being compromised. You can always trade online and transfer to a cold wallet afterward.
2: Build up your digital literacy to avoid scams
To ensure your cryptocurrency’s safety, you need to recognize some of the common sources of crypto scams. As with any kind of scam, be careful about emails, social media, and unfamiliar websites. The time-tested adage remains true in these cases: if it seems too good to be true, it probably is.
Watch out for ICOs (initial coin offerings) if the proposed cryptocurrency seems fishy. The same goes for crypto pump and dump schemes, so if tempted to buy a very low-valued cryptocurrency, do your research and tread with caution (or avoid it altogether).
When researching cryptos, seek multiple perspectives. It’s not uncommon for crypto supporters to paint a rosy view of the space overall. This makes sense, after all: they are ardent believers in the future of cryptocurrency. Seek out alternate viewpoints, and be wary of articles and content that seem to be aiming to influence or promote a specific asset. Like a detective, you can be open-minded (pursuing all avenues) as well as skeptical (not taking opinions at face value).
3. Back up your crypto
Whether you invest in Bitcoin or altcoins, backing up your cryptocurrency wallet is essential.
You should frequently back up anything connected to your cryptocurrency, store it in more than one secure location, and always use strong passwords on backups.
If you’re on more than one crypto platform, use different passwords for each one.
4. Update software
For any devices where you access cryptocurrency, keeping all software up to date can help safeguard against hackers.
5. Multisignature crypto wallets
Much like two-factor authentication, multi-signature (multi-sig) wallets require two or more private keys to sign and send a transaction, which helps lower the risk of unauthorized transactions.
Retail investors in Bitcoin, Ether, and other altcoins may use multi-sig to secure cold storage funds.
6. Don’t create digital copies of crypto information
Photos or screenshots or similar digital files that contain your sensitive cryptocurrency details should not exist. Avoid making any copies in a digital format, which could expose you to hackers. Save a physical copy of your private key in an extremely secure location like a fireproof safe, because losing that key could mean losing your investment.
Determining the riskiness of specific cryptos
While many cryptocurrencies fluctuate widely in value, some have historically provided steadier returns than others. That said, no investment is without risk and past performance does not guarantee future results. Some of the top cryptocurrencies according to Benzinga include Bitcoin, Ethereum, Polygon, Stellar, Cardano, and Chainlink. However, in general, altcoins are a bit riskier in terms of volatility relative to Bitcoin.
If you’re a follower of the stock market, there are many parallels here. There are established players that have a proven track record and broad adoption. These assets, like Bitcoin and Ethereum, are not without risk, but they may be less volatile than altcoins. Altcoins are similar to growth stocks or penny stocks. They are newer, with more to prove, but could have more potential upside. Just as is the case in the stock market, not all of these will be winners, and in fact, many likely will not. Investing in altcoin crypto assets may be riskier and investors should be wary of the potential risk before diving in.
Whatever cryptocurrency you decide to invest in (if any), be sure to study up on the fundamentals of the crypto asset and the safest ways to invest your money. Just like the stock market, some altcoins are “memecoins,” meaning many of their backers are less interested in the fundamentals and are instead more focused on speculation. Understanding the difference between believing in the long-term thesis or applications of a crypto, and riding a “memecoin” wave, is extremely important for beginners in particualr.
Bottom line
There’s still a lot we don’t know about cryptocurrency and its potential to impact the financial landscape. Beware of crypto’s volatility and make sure you understand the dynamics of the crypto landscape before making any moves.
For some investors, the risks of cryptocurrency investment outweigh potential benefits. However, with a trusted broker and an action plan for safeguarding your coins, it may be worth the leap. Diversification rules still apply here, and many experts say that crypto shouldn’t make up the majority of your portfolio.