Are cryptocurrenices safe or should new investors avoid them?

Cryptocurrencies are all over the news again as Bitcoin keeps hitting new record highs. The question of whether it’s safe to invest in cryptocurrency is a common concern for many investors.

Let’s take a look at some of the issues around investment in cryptocurrencies and explore whether they’re safe for new investors or whether they should be avoided.

What is cryptocurrency?

If you’re still not entirely sure what cryptocurrency is, don’t worry – you’re not alone.

Typically, cryptocurrencies are decentralised digital assets. This just means that they’re electronic and no single entity controls them. For a more detailed explanation, take a look at our article about cryptocurrency.

An important point to remember is that they’re all very different. So when we’re talking about how safe a cryptocurrency is, this can depend entirely on the digital asset in question. That being said, there are some overarching concerns.

Why isn’t cryptocurrency safe?

You don’t have to understand the nitty-gritty of every cryptocurrency, but it’s important to understand some basics of the crypto ecosystem before considering an investment.

Anonymity

A big initial selling point of some cryptocurrencies is anonymity. Transactions can be hard to track or trace. So when they’re stolen, the trail goes cold very quickly. This is why many cybercriminals still request cryptocurrency payment for ransomware attacks.

Storage

Most people buy, sell and store cryptocurrencies on exchanges. These are the cryptocurrency equivalent to share dealing platforms or stock exchanges.

The main issue is that cryptocurrencies held on them are often stored in one central wallet or location. These are not safe spaces for cryptocurrency. If the exchange is hacked, your investments could disappear.

What are some examples of cryptocurrency exchange issues?

There’s minimal regulation and no insurance for cryptocurrency, so there’s no retrieving your investment. A few famous instances of this include:

Mt. Gox

At one point, the Mt. Gox exchange was responsible for around 70% of global Bitcoin transactions. Then, in 2014, a hack led to the loss of 850,000 Bitcoins! Shortly afterwards, they filed for bankruptcy.

Today, investors around the globe are still desperately trying to recoup some of their lost investments.

QuadrigaCX

More recently, in 2019, there was a bizarre situation with QuadrigaCX, Canada’s most popular exchange. The CEO died suddenly at a young age. No one could access their cryptocurrency investments because he was the only person with full access to all of the assets held on the platform.

Is a cryptocurrency investment safe?

This is where a lot of confusion arises. Some of the underlying technology, like blockchain, is actually incredibly safe and secure. The likelihood of whole crypto networks being hacked is extremely unlikely (but still possible).

Adding humans into the equation is where things get dicey. Cryptocurrency is extremely unforgiving. Mistakes and lack of safe cryptocurrency procedures are rampant. Even with secure individual wallets, losing your access information or typing in a wallet address incorrectly means you can say goodbye to your investments.

It’s not just individual investors who are at risk. There have also been numerous malware schemes where hackers have hijacked computers in order to use them as mining machines to turn a profit.

These hacks that operate in the background can be really difficult to detect. Even institutions as big as the US Federal Reserve has suffered attacks like these on their servers.

Does it matter to investors if a cryptocurrency is safe?

Some investors are happy to take on the many risks. This is because they believe that the potential returns outweigh the level of risk.

This is an emerging technology and a very new space. The majority of cryptocurrencies won’t succeed in the long run. It’s likely that many will see a similar fate to the hordes of internet companies that tanked during the dot-com bubble.

Picking out which currencies will succeed is an impossible task.

What are the regulatory concerns?

The cryptocurrency market is constantly evolving. At one stage, it was completely unregulated. Now, governments are starting to catch up.

The SEC in America is currently suing Ripple, the company behind the XRP cryptocurrency. They argue that Ripple’s sale of their XRP token was actually the unsolicited sale of a security. It’s worth noting that this cryptocurrency isn’t actually decentralised, which is why it’s in trouble.

Here in the UK, the FCA recently banned the trading of cryptocurrency derivatives. Who knows what new measures will be brought in by regulators next?

Investing safely in cryptocurrency

If you really want to invest and are happy with the risks and safety concerns, there are a few things to bear in mind:

• Cryptocurrencies serve various purposes. Don’t just look at price movements before buying. Research the proposed use. This will help you weed out some of the many bogus cryptocurrencies available.
• Use a secure exchange or wallet for buying, selling, and storing any cryptocurrency investments.
• Be aware of potential future tax obligations.
• Only invest a small portion of your portfolio. Many enthusiasts recommend only investing around 1%.
• Cryptocurrencies aren’t insured or backed by anything, and their value could very easily drop to zero. So only invest money you can afford to lose.