Is Cryptocurrency Safe?

Investing
Updated: 23rd Feb 2021
Written by Sean Graytok
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Investing
December 23, 2020
Written by Sean Graytok

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Bitcoin is up more than 220% on the year and crushing all-time highs. But while the crypto space is buzzing, there are many on the sidelines asking, “is cryptocurrency safe?”

This article will highlight blockchain technology, best security practices for crypto investors, and will help you decide whether cryptocurrency is safe or not.

About Cryptocurrency

Cryptocurrency is a digital asset that can be sent and received online. It is secured by cryptography, a discipline of mathematics that uses proofs to guarantee high-security levels.

While there are thousands of different cryptocurrencies, only a few are relevant. These include Bitcoin, Ethereum, and Litecoin.

A common analogy is to think of cryptocurrencies like a Silicon Valley start-up. New coins will enter the market, most will fail, and few will win. This hypothetical notion brings us to speculation.

Cryptocurrency = Speculation

If you invested $100 in Bitcoin ten years ago, it would be worth tens of millions today.

Yes, hindsight is always twenty-twenty, but many investors are trying to find the next Bitcoin for their get-rich-quick scheme. This behavior brings a unique set of problems to the crypto space.

These new currencies are traded 24/7 by investors with vastly different motivations. Let’s use Ethereum, for example. A fraction believes in Ether’s long-term success and has no intentions of selling their position anytime soon.

Another portion is day trading the currency and just looking for volatility to buy low and sell high. A third group may own massive amounts of Ether and can move the entire market with one click.

Since cryptocurrencies are largely unregulated, there is no “entity” to step in if Ether drops 40% in a single day.

Wall Street can pause a security’s trading if it starts free-falling or if there is abnormal movement. There is no big brother or big sister in crypto.

While the distinction between crypto and traditional markets is clear, the law of supply and demand is found in both sectors.

When someone buys bitcoin, they decrease its amount in the available market and increase its scarcity. The price of the asset rises to reflect its new scarcity status.

Conversely, when an investor sells bitcoin, they put more shares of the digital asset in the market and availability soars.

The law of supply and demand will decrease its price because, well, maybe that asset is not so special after all. This cycle repeats constantly and down to the microsecond.

As you can see, there is a convergence of factors that result in crypto speculating:

No Regulation + 24/7 Trading + Supply & Demand = Crypto Speculation

Ready to take the Next Steps? Check out our list of the Best Cryptocurrency Exchanges

Is Cryptocurrency Safe?

Thus far, we have discussed the number of cryptos to trade and their varying levels of relevance. Unfortunately, most currencies will fail and do not deserve your time. Like most things left to free-market forces, a few will rise to the top and reap the benefits.

Currencies that prevail, like Bitcoin or Ether, are considered “safe” cryptocurrencies. However, these coins are still unprecedented assets.

A bug in the code or government regulation can cripple the asset and wipe away a large portion of their market value overnight.

Asking if crypto is safe is like asking if drinking water is safe. As we all know, clean filtered water will keep you hydrated and alive, while unfiltered water may contain deadly parasites.

The same goes with crypto — some coins are established and safe, while others will fail and go to zero.

Learn More: How to Buy Bitcoin

Investing in Cryptocurrency

It has never been easier to invest in crypto than today. Its growing popularity has caused resources to flood the space in terms of infrastructure, security, and education

Millions of consumers use crypto exchanges, such as Coinbase, Binance, and Gemini to buy and sell crypto safely and efficiently. You can visit their websites or download their mobile apps to start trading today.

There are still fees to buy and sell crypto, which vary depending on the exchange you choose. These fees typically range from 1% to 4% depending on the region you are in, the amount of crypto you’re trading, and whether you’re the sender or receiver.

In addition to fees, the security of the exchange needs to be considered. When trading on the exchange, your crypto is “hot” and susceptible to hackers.

We recommend using exchanges like Gemini that take extraordinary measures to safeguard your crypto.

Learn More: Is Bitcoin a Good Investment?

Paying with Cryptocurrency

One criticism of crypto is that nobody uses it as a medium of exchange. While this may be true in the United States, Bitcoin is commonly used in countries where financial corruption is rampant.

Charities with operations in these countries use Bitcoin to fund projects and services that would otherwise be subject to theft if traditional banking methods were used.

Moreover, citizens in countries where their currency is manipulated rely on Bitcoin to protect their purchasing power. It is common for these people to use crypto in exchange for goods and services.

Although it is less common, people in the United States still pay each other with crypto. There are fees associated with doing so, but these have decreased over time. Even though most businesses do not accept crypto as a form of payment, more and more companies implement this medium each year.

How Secure is Cryptocurrency?

Dominant cryptocurrencies are mathematically secure by the laws of the universe. Put simply, cryptography ensures someone cannot use funds in another person’s online wallet. Blockchain technology makes this level of security possible.

You can keep it in “hot” or “cold” wallets. A “hot wallet” is connected to the internet, whereas “cold storage” is not. As you can imagine, a cold wallet is more secure. It is harder for hackers to access your accounts and exploit your currency.

While the probability for blockchain to be hacked is low, the exchange you trade on is susceptible to hackers.

Taking security matters into your own hands is unique to owning crypto compared to traditional assets. There is no customer service to call or email if you lose track of your assets. This is the trade-off that comes with having complete control over your financial assets.

4 Things to Consider Before You Invest in Crypto:

Before you dive head-first into the world of cryptocurrency, there are a few things you need to consider.

#1. Volatility

It’s tough to trade crypto with weak hands. Although it is one of the better asymmetric assets to invest in, it is not immune to massive pullbacks in a short amount of time.

#2. Diversification is Still Important

We have established that there are only a few cryptocurrencies worth your time. However, cryptocurrency diversification is still important. Even though bullish crypto investors allocate most of their portfolio to Bitoin, they still maintain exposure to Ether as well.

#3. Different Exchanges

There are varying levels of security, depending on the exchange you choose. Some offer a seamless user interface but are lacking security. We recommend using exchanges that prioritize security, like Gemini.

They were the first crypto exchange and custodian to complete a SOC 2 Type 2 examination, which is the highest level of security compliance an organization can demonstrate.

#4. How to Store Cryptocurrency

As we stated earlier, your crypto is held in either “hot” or “cold” storage. Hot wallets are free and connected to the internet.

Although they are easier to access, they are less secure and more susceptible to hackers. Crypto kept in “cold storage” is offline and held in USB like devices. These hardware devices cost money, and their price depends on its security features.

Cryptocurrency vs U.S. Dollar

The U.S. dollar is subject to inflation while cryptocurrencies are not. The Federal Reserve can decide to print more U.S. dollars at any time. Within a matter of seconds, the $5 bill in your wallet is no longer the same $5. Your purchasing power decreases when more dollars are in circulation.

There is a finite amount of Bitcoin (21 million), making it deflationary and not subject to bankers telling you how much your currency is worth.

With the Federal Reserve printing new money at unprecedented rates, we may be entering a period of hyperinflation. Before Bitcoin, investors had few options to hedge against rising inflation, such as gold, real estate, or art. But Bitcoin has been the obvious winner in 2020.

U.S. Government’s Stance on Cryptocurrency

The United States Internal Revenue Service classifies crypto as property rather than a currency. This means investors are subject to taxes when you sell your crypto (for a profit).

However, there are unique products offered by BlockFi that allow users to unlock their crypto gains without executing a taxable event.

As of writing this article, there are no regulations to handicap crypto’s effectiveness. But, for cryptocurrencies to reach their full potential, regulation is inevitable.

Some crypto purists argue institutional adoption will ruin its anti-establishment narrative that has attracted many to the space. Other holders welcome mass adoption.

Crypto is certainly on the U.S. government’s radar. Incoming Republican Senator Cynthia Lummis is a Bitcoin investor and revealed she has owned it since it was invented. She plans to act as a medium to bring more positivity to Bitcoin in the U.S. Senate.

Senator Lummis opposed a bill proposed by Congresswoman Rashida Tlaib called the STABLE Act. If enacted, this bill will handicap issuers of stablecoins.

Why?

This bill requires issuers of stablecoins to meet a traditional bank’s requirements, such as receiving a charter, being FDIC insured, and maintaining reserves at the Federal Reserve.

What Are the Dangers of Cryptocurrency?

The perceived dangers of crypto are the same things that make it great. When your private keys secure your assets, you have complete control over your finances. If that USB goes missing, so does your crypto.

This kind of responsibility might scare newcomers to the space. Consumers are used to banks handling their assets and find comfort in knowing their money is insured.

Additionally, while it is easier than ever to start trading crypto, the possibility of getting hacked is still in the equation.

Although it is rare, keeping your assets on exchanges leaves them vulnerable. And once that crypto is stolen, it is gone forever. Few exchanges are insured.

However, these risks can be mitigated with the right security protocols. To safeguard your digital assets, you should:

  • Never screenshot Your Private Keys
  • Store Private Keys on Online
  • Invest in a “Cold Wallet”

We have all read about celebrity iCloud hacks. As a crypto investor, you need to veer on the side of extreme caution and keep your cold storage information offline.

Watch out for Cryptocurrency Scams

Most consumers have encountered scams that say, “send me $10, and I’ll send you $20 in bitcoin.” While this may seem like the worst scam in history, it has been quite effective.

And future crypto investors, please ignore the D.M.s. If you follow crypto accounts on Twitter or Instagram, you are likely to encounter phishing messages. They are obvious and easy to avoid.

Entering the crypto ecosystem is an exciting experience, but preparation is key. Hackers will go for the low hanging fruit, and this is typically crypto beginners. You need to understand cryptocurrency security protocols and best practices.

What is Cryptojacking?

Cryptojacking is when crypto miners gain access to your computer’s processing power and use it to mine on their behalf.

These attacks work by getting a victim to click on a phishing link, which simultaneously downloads crypto mining code onto your computer. It takes massive amounts of computational power to mine coins, and they will take all the help they can get (whether you like it or not).

You might not realize your computer has been crypto jacked unless you are savvy with computer software.

However, if your computer battery dies quickly or if your hardware routinely overheats, then it is worth investigating into. These are early signs that you might have been crypto jacked.

Is Crypto Real Money?

Money is a 10,000-year-old technology designed to solve the barter problem. What if two people want to engage in trade, but one person does not have something the other wants? Then, there is no trade.

Money solved this dilemma because everyone inherently wants money. Why does everyone want money? Because everyone else wants money.

For “money” to truly work, it must be scarce, divisible, storable, durable, fungible, verifiable, portable, difficult to counterfeit, and widely acceptable.

Humans used precious metals, such as gold, as currency for thousands of years, but metals are hard to carry around and not divisible. So, we made gold-backed paper to signify the amount of precious metal.

Then the government-backed paper abandoned the gold standard under President Richard Nixon’s order in the 1970s. Our paper is not tied to anything but the government’s word. Therefore, the federal reserve can print more and more at the discretion of politicians.

Our monetary system has been an experiment for the last 50 years, and it is still unsure whether this is the final stage of money’s evolution or not.

Relevant cryptos, like Bitcoin, satisfy the seven requirements of money better than gold or the dollar. It is better at being scarce and is divisible. Consumers can easily own and sell a fraction of 1 bitcoin. Just like investors can purchase fractional shares of stock.

Bottom Line: Is Cryptocurrency Safe?

Ultimately, the answer to “is cryptocurrency safe?” depends on the person and the kind of cryptocurrency.

If you stay away from sh*tcoins and prioritize security, you will be fine. With that said, we encourage you to keep researching. The more you know about cryptocurrency, the better.

More Crypto Resources:

Sean Graytok
Sean Graytok
Sean is a lifelong student of the financial, media, and marketing industries. He is a Generation Z investing expert and is on a mission to empower investors to make the most of their money.