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Cryptocurrency markets have had a rough time in 2022, so you may be questioning the safety and security of this bold new asset class.
Bitcoin (BTC) is down nearly 60% on the year. Meanwhile, crypto crimes are on the rise because of the lack of a legal framework. In the first quarter of this year alone, the Federal Trade Commission reported that $329 million in crypto was lost to cryptocurrency fraud.
Falling 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 whether Bitcoin is a safe investment depends on how you define security.
There’s no question that Bitcoin prices can be extremely volatile. In 2022 alone, the price of BTC dropped from almost $48,000 to around $19,500 at the time of this writing.
Losses like that would send investors running for the hills for any other asset class. If you define security as an investment with a relatively stable price, then Bitcoin may not be a safe bet for your investment portfolio.
That said, Bitcoin’s mercurial nature may be changing.
“Bitcoin is becoming more integrated with traditional financial markets and is seeing significant participation from retail and increasingly from institutional investors,” says Ryan Burke, general manager at Invest at M1. “Historically, BTC has been more volatile, but it has become a de facto mainstream alternative asset more recently correlated to large-cap tech.”
If you think of Bitcoin as digital gold, similar to a commodity rather than an investment security, you can add another dimension to the security question.
“Bitcoin technology is relatively safe, but it isn’t anonymous and relies on passwords,” says Daniel Rodriguez, chief operating officer at Hill Wealth Strategies.
While Bitcoin disguises your personal information, the address of your crypto wallet is publicly available.
“Hackers could use web trackers and cookies to find more information about the transactions that could lead to your private information and data,” Rodriguez says. If anonymity is part of your definition of security, Bitcoin might not be entirely secure.
Similarly, your cryptocurrency is only as secure as the crypto wallet you keep it in. If you lose your wallet password or someone else gets ahold of it, you lose your Bitcoin.
You will often see the disclaimers “not SIPC protected” or “not FDIC insured” attached to Bitcoin purchases. It means should the firm that holds your crypto investments fail, neither of these backstops will bail you out.
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 D.A. Davidson Co. “It has survived unscathed for the 13 years of its existence and has yet to be hacked.”
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Things to Consider before Buying Bitcoin
Given Bitcoin’s high volatility and security risks, it’s important to consider your reasons for buying before you trade any 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 recommend investors only consider investing capital they are willing to lose,” he says.
Are you buying Bitcoin as an investment to fund your retirement? In that 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 to less than 5% of your overall portfolio.
You should brace yourself for an unreliable narrator if you think Bitcoin is a currency. You could easily log off the computer one day with $60,000 in BTC and log on with only $45,000 the next morning.
Then there’s the uncertainty around the crypto regulatory environment.
Currently, there is no overarching regulatory framework like how the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) regulate securities or the Federal Reserve and the FDIC regulate banks.
While Burke is optimistic about long-term developments for Bitcoin, uncertainty is an investor’s worst enemy. Assuming you’re 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. There are many risks to cryptocurrency, from market risks to regulatory risks and cybersecurity risks.
“Market risk is one of the biggest risks associated with Bitcoin,” Rodriguez says. Just look at any price history chart and see what kind of a wild ride Bitcoin investors are in for.
“Historically, Bitcoin also reacts inversely to interest rates,” he says. “So, when the Fed raises rates, Bitcoin typically takes a dip because investors start leaning toward more safe and stable investments.”
Regulatory uncertainty also poses a risk.
“In 2021, China, the world’s second-biggest economy, effectively made it illegal for citizens to mine or hold any cryptocurrency,” Rodriguez says.
If other countries follow suit, Bitcoin holders could be in hot water.
Cybersecurity is another chief concern for all holders of digital assets. Remember that your transactions are only as anonymous and secure as your wallet information and passwords.
The Department of Justice recently proved blockchain transactions are not immune to tracing when it followed the trail left by a couple attempting to launder $4.5 billion in cryptocurrency stolen in the 2016 Bitfinex hack.
There’s 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 crimes or scams from October 1, 2020, through March 31, 2021.
How to Keep Your Bitcoin Safe
Your Bitcoin’s safety depends largely on how you store it. Your choice of crypto wallet and the level of encryption it uses play a big part in keeping your coins safe.
“Security and convenience do not always go hand-in-hand,” Burke says.
He says that offline “cold” wallets that are not connected to the internet are secure from hacking but less convenient than hot wallets. Cold wallets are also subject to theft or loss. “Lose a device or drive or misplace your private key, you have a problem,” says Burke.
Hot wallets are more convenient because you can access your cryptocurrency from anywhere you have an internet connection or cell service, but they are more vulnerable to hacking.
“A prudent strategy is to use a combination of hot and cold storage, with most assets being held in cold storage,” Burke says.
Burke adds whatever storage method you choose, make sure you know if your crypto is being loaned, staked or pledged as collateral.
Experts say it’s important to read the terms and conditions before signing up for a wallet or service, lest your cryptocurrency inadvertently ends up as another victim of the crypto liquidity crisis.
As with any investment, research whether investing in Bitcoin is right for your investment portfolio. If you buy BTC as part of your investment strategy, prepare for highs and lows.