Cryptocurrency markets have had a rough time in 2022, so you may question the safety and security of this brave new asset class.
Bitcoin (BTC) is down nearly 60% year to date. Meanwhile, due to the lack of a legal framework, crypto crimes are on the rise.
Falling prices and increased risk of criminal attacks are enough to make anyone think twice about Bitcoin’s security.
Is Bitcoin a Safe Investment?
Figuring out whether Bitcoin is a safe investment depends on how you define safety.
There is no doubt that Bitcoin prices can be extremely volatile. In 2022 alone, the price of BTC has fallen from around £39,000 to around £17,000 at the time of writing.
Losses like these would send investors running for the hills for any other asset class. If you define a security as an investment with a relatively stable price, then Bitcoin may not be a safe bet for your investment portfolio.
However, the mercurial nature of Bitcoin may change.
“Bitcoin is becoming more integrated with traditional financial markets and is seeing significant participation from retail and increasingly institutional investors,” said Ryan Burke, senior manager of Invest at M1. “Historically, BTC has been more volatile, but it has recently become a de facto major alternative asset associated with high-volume technology.”
If you think of Bitcoin as a commodity-like digital gold rather than an investment security, you can add another dimension to the security question.
“Bitcoin technology is relatively secure, but it is not anonymous and relies on passwords,” said Daniel Rodriguez, chief operating officer of Hill Wealth Strategies.
Although Bitcoin hides your personal information, your crypto wallet address is publicly available.
“Hackers can use web trackers and cookies to find out more about your personal information and transactions that may lead to your data,” Rodriguez says. If anonymity is part of your understanding of security, Bitcoin may not be completely secure.
Likewise, your cryptocurrency is only as safe as the crypto wallet you store it in. If you lose your wallet password or someone else gets it, you lose your Bitcoin.
It’s important to note that none of these concerns relate to the security of the Bitcoin network, according to Gil Luria, technology strategist at DA Davidson Co. “It has survived 13 years of existence unscathed and has yet to be hacked.”
Things to consider before buying Bitcoin
Given Bitcoin’s high volatility and security risks, it’s important to consider your reasons for buying before trading any dollars for BTC.
Luria says cryptocurrency is a highly speculative investment. “The risk/reward profile of investing in Bitcoin is different from investing in most stocks or bonds. We advise investors to only invest in capital 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 because no one can predict where the market will go. Most financial advisors recommend keeping Bitcoin in less than 5% of your total portfolio.
If you think Bitcoin is a currency, prepare yourself for an unreliable narrator. You can easily leave the computer one day with £50,000 in BTC and come in the next morning with only £37,500.
What are the risks of Bitcoin?
Like any investment, Bitcoin is not without risk. Cryptocurrency has many risks, from market risks to regulatory risks to cybersecurity risks.
“Market risk is one of the biggest risks associated with Bitcoin,” Rodriguez said. Look at any price history and see what kind of wild ride Bitcoin investors are in for.
Regulatory uncertainty also creates risk.
“In 2021, China, the world’s second largest economy, made it virtually illegal for citizens to mine or hold any cryptocurrency,” Rodriguez said.
Bitcoin owners could be in hot water if other countries follow suit.
Cybersecurity is another major concern for all owners of digital assets. Remember that your transactions are only as anonymous and secure as your wallet details and passwords.
How to keep your Bitcoin safe
The security of your Bitcoin largely depends on how you store it. The crypto wallet you choose and the level of encryption it uses play a big role in keeping your coins safe.
“Security and convenience don’t always go hand in hand,” says Burke.
Offline “cold” wallets that don’t connect to the internet are secure without being hacked, but less convenient than hot wallets, he says. Cold wallets are also subject to theft or loss. “Lose a device or a driver or misplace your private key, you’re in trouble,” Burke said.
Hot wallets are more convenient because you can access your cryptocurrency from anywhere you have an internet connection or mobile service, but they are more vulnerable to hacking.
“A prudent strategy is to use a combination of hot and cold storage, with the majority of assets held in cold storage,” says Burke.
Burke adds the storage method of your choice, making sure you know if your cryptocurrency is being loaned, pledged, or pledged.
Experts say it’s important to read the terms and conditions before signing up for a wallet or service, lest your cryptocurrency accidentally become another victim of the crypto liquidity crisis.
As with any investment, research whether investing in Bitcoin is right for your investment portfolio. If you are buying BTC as part of your investment strategy, be prepared for highs and lows.