Are Bitcoin and the wider crypto market safe for investors?
Is crypto safe? This question has two paths it can lead us down: are we safe from crypto being lost or stolen, and is crypto a safe place for us to try and increase our wealth. I will cover both paths in this post. Buckle up, it’s going to get interesting!
The technology behind most cryptocurrencies is inherently safe, but there are people out there looking to capitalise on the unwitting. If we follow best practices then we can reduce the risks associated with crypto investing. Investing in crypto, like all investing, carries the risk that we may lose all our investment from falling markets. The gains, however, can be substantial.
Please note that I am not a financial advisor and this is a guide only – I am not advising that you buy cryptocurrency. I do not know your financial situation and you should always perform your own research and make up your own mind. Investing is a high-risk activity and you should only invest what you can afford to lose.
Is crypto a safe investment?
Let’s first look at the safety of crypto as an investment, and remove the loss aspect for a while.
All investments are a risk. This is a fact. Whatever amount of money we invest, we may lose. So what we must consider is: is crypto a riskier investment than other forms of investment.
Crypto investing vs stocks and share
If we compare crypto investing to stocks and shares then it would take a brave person to say that crypto isn’t the riskier option. Crypto is relatively new and untested. Because of the lack of historical data, it is harder to try and predict how it will perform in the long run and how it will react to world events.
Stocks and shares on the other hand have been around for a while. We have a lot of data to analyse and can make assumptions on how the markets will handle world events and investor fear levels.
Crypto volatility
Bitcoin is volatile, and smaller coins are extremely volatile. Bitcoin has swung between $60,000 and $30,000 dollars within a year, with many peaks and troughs along the way. This is volatile by anyone’s measure. If we are looking to invest a grand and quickly double our investment, then we must consider the alternative that we could just as easily half our investment, or more, within the same timeframe.
While considering crypto as an investment, you may want to read: Is Crypto Dead? Or an Outstanding Opportunity
Is crypto safe from hackers, scams and data loss?
If we decide that the risk is worth the gain from a market standpoint then we still need to consider the other side of the coin – we have to consider if crypto is safe from nefarious acts and from ourselves.
Crypto is a digital asset that we cannot physically hold and keep safe by brute strength – or can we? There are different ways we can store crypto and some are safer than others. It will be up to you to decide which is the safest option.
Blockchain, where crypto transactions take place, is inherently safe. Blockchains work by creating a new link in a chain of transactions every time a transaction takes place. The chain is verified by a network of computers which first check the validity of the existing chain, then, if the existing chain matches the records, it adds the new link to the end. A new longer chain is now live and distributed among the network.
By having this common ledger spread out across the network, it would be extremely costly and difficult for anyone to take advantage of the system.
Hackers
It is incredibly hard to hack into a secure crypto wallet, so the worry around hackers comes if we store our crypto on a centralized exchange. Centralized exchanges such as Binance and Kraken spend incredible amounts of money on security. It’s in their best interests to keep your crypto safe. But, while our crypto is in their hands, there is an increased chance, however small, of hackers getting their hands on it.
We can reduce this risk by ensuring we only keep what we need for trading on these exchanges and use Multi-Factor Authentication with a strong password. For crypto that we aim to hold for the long term, it may be best to move this to a wallet.
Scams
Thieves are everywhere. As long as there is poverty and greed there will be thieves. Due to crypto still being in its infancy, it is a great space for scammers to operate. They pray on users with little experience in the space.
If you have been in crypto for any time at all then you have probably come across one of these scams. Someone asking for you to send them Bitcoin, or a promise to send you Bitcoin if you first verify your account by sending them x amount.
The safest way to avoid scams is to educate yourself as much as possible. Get involved in the community so you can ask others if something feels off. And remember, if it sounds too good to be true, then it probably is.
Data loss
If our money is digital, can we simply lose it to a computer failure?
This is an understandable worry, but an unwarranted one if we take the right precautions. I’ll cover the different ways to store crypto below, but for now, it’s important to remember that we must keep our seed phrase for our wallets safe.
Our crypto wallets may be installed on our phones or computers but these devices don’t actually hold the crypto. They hold our keys to access our crypto. Should we lose our phone or our computer explodes, we can download the wallet software again and recover our wallet by providing the seed phrase we received when creating the wallet. The seed phrase is tied to our private key and therefore we can recover our crypto.
How to keep your crypto safe
We have a few options for where to store our crypto:
- Exchanges
- Hardware wallets / hot wallets
- Software wallets / cold wallets
- Paper wallets
Exchanges
Keeping our crypto on exchanges (Binance, Kraken etc) is probably where most of us started. It’s an easy option to begin with and there are often incentives to do so.
Keeping our crypto on exchanges means that the exchange is responsible for security measures and for storing our private keys. Although potentially slightly riskier than holding the crypto ourselves, any good reputable exchange will have invested heavily in security.
There is of course the risk that the exchange may be hacked or go bankrupt. If this happens then there is a risk we will lose all our crypto stored there.
Hardware wallets
A hardware wallet is not connected to the internet. It is a physical device much like a USB stick. These devices are considered to be the most secure way to store crypto as they cannot be accessed through the internet. They are also known as cold wallets.
It’s worth noting that even if you lose your hardware wallet, you can still recover your crypto through the use of a seed phrase.
Software wallets
Software wallets are pieces of software installed on your phone or computer that give you access to your crypto. Due to their nature of being online, they have a higher chance of being compromised than a hardware wallet. These wallets are often referred to as hot wallets.
Paper wallets
Paper wallets carry a certain amount of romance for me. I can picture them featuring in crypto films of the future for some artsy cinemaphotography. They consist of your private keys written down on a piece of paper and stored somewhere safe. Simple.
Not as efficient as the other methods, but secure. Paper wallets are only as secure as your chosen safe place.
Is crypto safer than money and traditional banking systems?
It’s … different. We can lose physical money quite easily by it falling out of our pockets. That can’t happen with crypto unless we use a paper wallet and are very unlucky
Identity theft
Without the need to provide personal information to use crypto, there is less risk of identity theft than using a traditional bank. If we don’t provide personal information to other parties, then it can’t be used against us.
Inflation
Some cryptocurrencies have a finite amount of availability. This creates some protection against inflation as more coins will not be minted. Traditional cash currencies on the other hand hold the risk of governments printing more and more as they see fit – reducing the value.
Is crypto safe for the environment?
At the moment – no. In the future – hopefully!
The two predominant methods for validating crypto transactions are Proof of Work and Proof of Stake. Proof of Work is energy-intensive. Unfortunately, the two main players in the crypto world, Bitcoin and Ethereum, run Proof of Work.
Proof of Work also generates a lot of electronic waste as miners are required to have up-to-date hardware to mine efficiently. Information presented by digiconomist.net here, suggests that the average e-waste per Bitcoin transaction is equivalent to the weight of 2.31 iPhones, and the annual waste is comparable to that of the Netherlands.
Proof of Stake is far more environmentally friendly as it doesn’t pit competing miners against each other. Instead, the transactions are verified by a randomly chosen user to verify the transaction. The user will have to have decided to stake their coins before they can be chosen. If they are chosen then they receive a reward.
With the world becoming more environmentally conscious, it’s likely that the crypto world will adopt Proof of Stake more than Proof of Work, or another more eco-friendly alternative. But as long as the big players are using Proof of Work, the environmental impact will remain large.
Some good news on the environment front is that Ethereum is in the process of testing Proof of Stake and it has been suggested that it may transition later in 2022.
Conclusion and how crypto safety will help me pay off my mortgage
If we follow safety procedures then crypto can be seen as safe from theft and loss, but we must always remember that investing is an inherently risky activity. Whenever we make an investment we must recognise the fact that we may lose all that we have invested.
For me, crypto investment is a big part of my plan to pay off my mortgage within five years. I actively seek to understand the safety measure required to keep my investments safe and keep up to date with the latest scams so I can avoid them.
Thanks for reading
Iain McClafferty – The Five Year Mortgage
