The cryptocurrency markets have been rough in 2022, so you may be wondering if this bold new asset class is safe and secure.
Bitcoin (BTC) has lost almost 60% of its value this year. In the meantime, because there aren’t any laws, crypto crimes are on the rise. The Federal Trade Commission said that cryptocurrency fraud cost $329 million in just the first three months of this year.
When prices are going down and criminal attacks are becoming more likely, it’s hard not to worry about the safety of your Bitcoin.
Is It Safe to Invest in Bitcoin?
How you define security will tell you if Bitcoin is a safe investment or not. There’s no doubt that the price of Bitcoin can change a lot. Just in 2022, the price of BTC fell from almost $48,000 to around $19,500, when this article was written.
Investors would run away from any other asset class if they saw losses like that. If you think of a safe investment as one with a price that stays pretty steady, Bitcoin might not be a good choice for your portfolio.
But Bitcoin may not always be so unpredictable for much longer.
Ryan Burke, general manager of Invest at M1, says, “Bitcoin is becoming more integrated with traditional financial markets, and institutional investors are getting more and more interested in it.” “BTC has been more volatile in the past, but it has become a mainstream alternative asset linked to large-cap tech in recent years.”
If you think of Bitcoin as digital gold, which is more like a commodity than an investment security, you can add another layer to the security question.
Daniel Rodriguez, chief operating officer at Hill Wealth Strategies, says, “Bitcoin technology is pretty safe, but it isn’t anonymous and relies on passwords.” Even though Bitcoin hides your personal information, anyone can find out the address of your crypto wallet.
Rodriguez says, “Hackers could use web trackers and cookies to learn more about your transactions, which could lead them to your private information and data.” If you count anonymity as part of what makes something safe, Bitcoin might not be completely safe.
In the same way, the security of your cryptocurrency depends on how you store it. If you forget your wallet password or someone else gets it, you will lose your Bitcoin.
On Bitcoin purchases, you will often see the words “not SIPC protected” or “not FDIC insured.” It means that neither of these safety nets will help you if the company that holds your crypto investments goes bankrupt.
Gil Luria, a technology strategist at D.A. Davidson, says that none of these worries are about the safety of the Bitcoin network itself. “It has been around for 13 years and has never been damaged or hacked,” said Davidson Co.
Things to Consider Before Buying Bitcoin
Because Bitcoin is very volatile and has security risks, you should think about why you want to buy it before you trade dollars for BTC.
Luria says that cryptocurrency is a very risky investment. “Investing in Bitcoin is different from investing in most stocks or bonds in terms of the risk and reward. We usually tell investors to only invest money they can afford to lose,” he says.
Do you plan to use Bitcoin as a retirement investment? If that’s the case, it’s probably best to limit your risk as much as possible since no one can tell where the market will go. Most financial advisors say that you shouldn’t have more than 5% of your portfolio in Bitcoin.
If you think Bitcoin is money, you should be ready for a storyteller you can’t trust. You could leave the computer one day with $60,000 in BTC and come back the next morning with only $45,000.
Then there’s the uncertainty about how cryptocurrencies will be regulated.
At the moment, there is no overall regulatory framework like how the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regulate stocks and the Federal Reserve and the FDIC regulate banks.
Burke is optimistic about what will happen to Bitcoin in the long run, but uncertainty is the worst thing for an investor. Bitcoin can be a part of your financial life, as long as you’re okay with the risks and uncertainty.
What Are the Risks of Bitcoin?
Bitcoin is not a risk-free investment, like any other. Cryptocurrency has a lot of risks, including market risks, regulatory risks, and cybersecurity risks.
Rodriguez says that market risk is one of the biggest risks that come with Bitcoin. You can see what a wild ride Bitcoin investors are in for by looking at any price history chart.
“In the past, Bitcoin has also moved in the opposite direction of interest rates,” he says. So, when the Fed raises interest rates, Bitcoin prices usually go down because investors start looking for safer investments.
Uncertainty about regulations is also a risk.
“In 2021, China, the world’s second-largest economy, made it illegal for its citizens to mine or hold any cryptocurrency,” Rodriguez says.
If other countries do the same, people who own Bitcoin could be in trouble.
Cybersecurity is another thing that all owners of digital assets worry about a lot. Remember that your transactions are only as safe and anonymous as the information and passwords you use for your wallet.
Recently, the Department of Justice followed the trail left by a couple trying to wash $4.5 billion in cryptocurrency stolen in the 2016 Bitfinex hack. This showed that blockchain transactions are not impossible to track.
Also, cryptocurrency crime is becoming a bigger problem. The FTC says that from October 1, 2020, to March 31, 2021, about 7,000 people said they lost an average of $1,900 in cryptocurrency to scams or crimes.
How to Keep Your Bitcoin Safe?
How you store your Bitcoin is a big part of how safe it is. How safe your coins are depends a lot on the type of crypto wallet you choose and the level of encryption it uses.
“Security and ease of use don’t always go together,” says Burke.
He says that “cold” wallets that are not connected to the internet and can’t be hacked are safer than “hot” wallets but are less convenient. Even cold wallets can be stolen or lost. “You have a problem if you lose a device or drive or if you lose your private key,” says Burke.
You can access your cryptocurrency from anywhere with an internet connection or cell service, which makes hot wallets more convenient, but they are also easier to hack.
“It’s smart to use a mix of hot and cold storage, with most of your assets kept in cold storage,” says Burke. Burke says that no matter how you store your cryptocurrency, you should know if it is being loaned, staked, or pledged as collateral.
Experts say that before you sign up for a wallet or service, you should read the terms and conditions. If you don’t, your cryptocurrency could become another victim of the crypto liquidity crisis.
Like any other investment, you should do research to see if Bitcoin is a good fit for your portfolio. If you buy BTC as an investment, you should be ready for both highs and lows.