Editor’s Note: We earn a commission from affiliate links on Forbes Advisor. Commissions do not affect the opinions or ratings of our editors.
Cryptocurrency markets have had a rough time in 2022, leaving you questioning the safety of this bold new asset class.
Bitcoin (BTC) is down nearly 60% year-over-year. Due to the lack of a legal framework, crypto crimes are now increasing. In the first quarter of this year alone, the Federal Trade Commission reported that $329 million worth of crypto was reported lost to cryptocurrency fraud.
Declining prices combined with the increasing risk of criminal attacks are enough to make anyone think twice about the security of their bitcoin.
Is Bitcoin a Safe Investment?
Understanding if Bitcoin is a safe investment depends on how you define safety.
There is no question that bitcoin prices can be extremely volatile. In 2022 alone, the price of BTC fell from almost $48,000 to around $19,500 at the time of writing.
Losses like these would send investors fleeing for any other asset class. If you define safety as an investment with a relatively stable price, Bitcoin may not be a safe bet for your investment portfolio.
However, the mercury nature of Bitcoin could change.
“Bitcoin is becoming more integrated into traditional financial markets and is seeing significant participation from retail and increasingly institutional investors,” said Ryan Burke, general manager at Invest at M1. “Historically, BTC has been more volatile, but it has become a de facto mainstream alternative asset that has more recently been correlated with large-cap technology.”
If you think of Bitcoin as digital gold, similar to a commodity, and not as an investment security, you can add another dimension to the security question.
“Bitcoin technology is relatively secure, but it’s not anonymous and relies on passwords,” said Daniel Rodriguez, chief operating officer at Hill Wealth Strategies.
While Bitcoin obfuscates your personal information, your crypto wallet address is publicly available.
“Hackers could use web trackers and cookies to find out more information about the transactions that could lead to your private information and data,” says Rodriguez. If anonymity is part of your definition of security, Bitcoin may not be entirely secure.
Likewise, your cryptocurrency is only as secure as the crypto wallet you keep it in. If you lose your wallet password or someone else finds out about it, you will lose your bitcoin.
When buying bitcoin, you will often see the disclaimers “not SIPC protected” or “not FDIC insured”. This means that should the company holding your crypto investments fail, none of these backstops will save you.
It’s worth noting that none of these concerns relate to the security of the Bitcoin network itself, according to Gil Luria, technology strategist at DA Davidson Co. “It has survived its 13 years of existence unscathed and has yet to be hacked.”
Offers from selected partners
Welcome offer:
Get up to $240 on your first deposit (US only)
Cryptocurrencies available for trading
20+
Fees (Maker/Taker)
0.40%/0.40%
Cryptocurrencies available for trading
170+
Fees (Maker/Taker)
0.95%/1.25%
Cryptocurrencies available for trading
200+
Things to consider before buying Bitcoin
Given Bitcoin’s high volatility and security risks, it’s important to consider your reasons for buying it before exchanging dollars for BTC.
Cryptocurrency is a highly speculative investment, says Luria. “The risk/reward profile of investing in Bitcoin differs from investing in most stocks or bonds. We tend to advise investors to only invest capital that they are willing to lose,” he says.
Are you buying Bitcoin as an investment to fund your retirement? In this case, it’s probably best to keep your exposure to a minimum as no one can predict where the market will go next. Most financial advisors recommend limiting Bitcoin to less than 5% of your total portfolio.
Be prepared for an unreliable narrator if you believe Bitcoin is a currency. You could log out of the computer one day with $60,000 in BTC and log in the next morning with just $45,000.
Then there is the uncertainty surrounding the crypto regulatory environment.
Currently, there is no overarching regulatory framework like the Financial Industry Regulatory Authority (FINRA) and Securities Exchange Commission (SEC) regulate securities, or the Federal Reserve and FDIC regulate banks.
While Burke is optimistic about long-term developments for Bitcoin, uncertainty is an investor’s worst enemy. Provided you are comfortable with the risks and uncertainty, Bitcoin can have a place in your financial life.
What are the risks of Bitcoin?
Like any investment, Bitcoin is not risk free. Cryptocurrency poses many risks, from market risks to regulatory risks to cybersecurity risks.
“Market risk is one of the biggest risks associated with bitcoin,” says Rodriguez. Just look at any price history chart and see what a wild ride bitcoin investors are in for.
“Historically, Bitcoin also reacts inversely to interest rates,” he says. “So when the Fed hikes rates, Bitcoin typically takes a dip as investors start moving to safer, more stable assets.”
Regulatory uncertainties also pose a risk.
“In 2021, China, the world’s second largest economy, has effectively banned citizens from mining or owning cryptocurrencies,” Rodriguez said.
If other countries follow suit, Bitcoin holders could be in hot water.
Cyber security is another major concern of all digital asset owners. Remember that your transactions are only as anonymous and secure as your wallet information and passwords.
The Justice Department recently proved that blockchain transactions are not immune to tracing when it followed the lead of a couple trying to launder $4.5 billion worth of cryptocurrency stolen in the 2016 Bitfinex hack.
There is also the rising threat of cryptocurrency crime. The FTC reports that nearly 7,000 people reported losing an average of $1,900 in cryptocurrency to crime or fraud from October 1, 2020 to March 31, 2021.
How to keep your bitcoin safe
The safety of your bitcoin largely depends on how you store it. Your choice of crypto wallet and the level of encryption used plays a big part in keeping your coins safe.
“Safety and comfort don’t always go hand in hand,” says Burke.
He says offline “cold” wallets that aren’t connected to the internet are safe from hackers, but less convenient than hot wallets. Cold wallets are also subject to theft or loss. “If you lose a device or drive, or misplace your private key, you have a problem,” says Burke.
Hot wallets are more convenient since you can access your cryptocurrency from anywhere you have an internet connection or cellular service, but they are more vulnerable to hacking.
“A prudent strategy is to use a combination of warm and cold storage, with most assets held in cold storage,” says Burke.
Burke adds your storage method of choice, make sure you know if your crypto is being borrowed, slotted, or pledged as collateral.
Experts say it’s important to read the terms and conditions before signing up for any wallet or service so your cryptocurrency doesn’t accidentally end up as another victim of the crypto liquidity crunch.
As with any investment, do your research to see if investing in Bitcoin is right for your investment portfolio. If you decide to buy BTC as part of your investment strategy, prepare for all the possible ups and downs.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.