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January 20, 2023

Is Cryptocurrency Safe?

Is Cryptocurrency Safe?

If you're wondering about investing in cryptocurrency, you're not alone.

Many people are scratching their heads over these new blockchain assets and saying: What are they — and is cryptocurrency safe?

Another way to explain it is that people are often nervous about things they don't fully understand. So it makes sense for them to be cautious of crypto because cryptocurrency is one of the most confusing types of investments out there.

First of all, it's a kind of digital money. Secondly, people have questions about the blockchain and what that is. Third, they have real concerns about volatility or fluctuation, and it’s sensible to be worried about that when you're getting into the cryptocurrency world.

So let's talk about cryptocurrency, what it is, and where it will likely go.

What Is Cryptocurrency?

Cryptocurrency is digital money that lives on a digital ledger called the blockchain.

The blockchain is a database that stores data in blocks, linking those blocks together in chains. The resulting digital ledger stores all of the transactions on computer networks that use a blockchain, and distributes this to all involved parties in a decentralized way. 

Cryptocurrencies are often denominated in coins or tokens that are interchangeable with one another. A particular cryptocurrency on its own blockchain has a market cap showing how big that digital treasury is — how much of this stuff is floating around in the world. Then the currency also has a value that changes over time with the market. 

Because cryptocurrency is digital, people keep it in specialized digital wallets. They can buy, sell, and trade the assets or hold them in the hope that they’ll gain interest. They can also use crypto for various kinds of online gaming. 

What Are the Risks of Cryptocurrency?

Here's where the risk isn't — with cryptocurrency, you don't have the same theft risks that you have with cash. You have private keys that establish you as the owner of your digital assets. When you hold them in certain kinds of cold wallets, they are pretty safe, as long as the wallet itself is secure.

Some of the risks around cryptocurrencies include keeping them on exchanges or proprietary platforms where you can experience “rug pulls” — in which someone hypes a project and then takes off with the funds. Hacking has occurred as well, where malicious actors (often thieves) get into systems and access assets and their keys.

You can also have massive volatility — coin prices go way up, and then they go way down. For example, lots of people made millions with BTC as the price continued to spiral up. But people who bought at the top, at around US$60,000 per coin, now have only about one-third of their original investment in hand. That's volatility, and it's very applicable to cryptocurrencies in general and BTC in particular!

What Are the Benefits of Cryptocurrency?

Although the above risks exist with cryptocurrency, you can also see some specific benefits.

For example, cryptocurrency is easy to buy and sell. It can be used for some merchant transactions and is also a great store of value. That's why Microstrategy, Tesla, and other companies have used it for establishing digital capital reserves.

Cryptocurrency is also held in an open community with a consensus-based verification design.

How does this work? Suppose you went to a wedding and there was no marriage certificate. But 300 people showed up. How do you prove that the people were married? You ask some of those 300 people.

When you think about it like this, you can see how ironclad cryptocurrency is in some ways. But that doesn't mean there aren’t risks, as mentioned above. Investors need to approach crypto securely, just like with other kinds of assets. Where you do business and how is essential. 

Cryptocurrency also offers benefits to the many people that the financial world calls the “un-banked” — people who find it difficult to access conventional checking accounts and payment systems.

Using cryptocurrency, they can bypass all the elaborate and sometimes costly ways banks manage money. Cryptocurrency is also not tied to the things the Federal Reserve Bank does that affect the dollar. So some investors worried about inflation are hedging with cryptocurrencies.

What Are the More Secure Ways to Buy Cryptocurrency?

Some investments in cryptocurrency are more secure than others.

One of the safest ways to buy cryptocurrency is by using something called a “self-custodial wallet.”

Unlike custodial wallets, the self-custodial wallet allows an investor to get full control of their crypto. The self-custodial wallet (also called “non-custodial”) involves the asset owner having the keys to the asset themselves.

In addition, many experts would say that you’re best off keeping your cryptocurrency offline in a cold wallet. It can't go anywhere when it's not connected to the internet. You should be in good shape if you keep your physical hardware in a safe place and maintain access to your keys.

Most Secure Crypto Coins to Invest In

What are the most secure cryptocurrencies to invest in? Well, one way to put it is that you want to focus on cryptocurrencies that don't have as much volatility. For example, BTC rose to $60,000 and then sunk back to $20,000 within the past couple of years. It might be back at $60,000 next year, or it might be at $200,000. It might also be at $6,500 like it was in March of 2020.

For example, coins like Litecoin and specific hard forks of ETH have lower per coin prices. That often means you can expect less volatility in the market, so you could say that these purchases are a safer way to invest. You're not as likely to lose massive amounts of value quickly. You also have newer blockchains like Solana that are used for NFT production, and some of these can be more stable as well.

Then there are the crypto coins known as “stablecoins,” like Tether, that are tied to U.S. dollar values. Some investors feel these are the more stable options, although detractors point out that they’re not truly decentralized as in the original concept of Bitcoin. 

Conclusion

You have a lot to choose from when it comes to cryptocurrencies. Do the research around a particular coin and look at its past chart value. How much does that go up and down? Look for coins that are steadily establishing themselves as either payment media, stores of value, or other utilities in the market, like NFT minting currencies.

By knowing more about what cryptocurrency is and isn't, and by knowing the risks and benefits, you can make a smarter and safer investment plan. Take a look at other articles in our Resource Center for further information. We cut through the jargon and confusion and make it easy to get started so you can become a crypto investor with confidence and a solid game plan.

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