Cryptocurrency markets 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% year-to-date. Meanwhile, crypto-crime is increasing due to the lack of a legal framework.
Falling prices combined with increasing risk of criminal attacks is 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 is no doubt that Bitcoin prices can be extremely volatile. In 2022 alone, the price of BTC fell from almost £39,000 to around £17,000 at the time of writing.
Losses like this would send investors running for the hills for any other asset class. If you define safety as an investment with a relatively stable price, Bitcoin may not be a safe choice for your investment portfolio.
That said, Bitcoin’s mercurial nature could change.
“Bitcoin is becoming more integrated with traditional financial markets and is seeing significant participation from retail and increasingly from institutional investors,” said Ryan Burke, managing director of Invest at M1. “Historically, BTC has been more volatile, but it has become a de facto mainstream alternative asset that has recently been correlated to large-cap technology.”
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 issue.
“Bitcoin technology is relatively secure, but it is not anonymous and relies on passwords,” said Daniel Rodriguez, CEO of Hill Wealth Strategies.
While Bitcoin hides your personal information, the address of your crypto wallet is publicly available.
“Hackers can use web tracking and cookies to find more information about the transactions that can lead to your private information and data,” says Rodriguez. If anonymity is part of your definition of security, Bitcoin may not be completely secure.
Likewise, your cryptocurrency is only as secure as the crypto wallet you store it in. If you lose your wallet password or someone else gets hold of it, you lose your Bitcoin.
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 unscathed in its 13 years of existence 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.
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 total portfolio.
You should brace yourself for an unreliable narrator if you think Bitcoin is a currency. You can easily log off your computer one day with £50,000 in BTC and log on with only £37,500 the next morning.
What are the risks of Bitcoin?
Like any investment, Bitcoin is not risk-free. There are many risks to cryptocurrency, from market risk to regulatory and cyber security risks.
“Market risk is one of the biggest risks associated with Bitcoin,” says Rodriguez. Just look at any price history and see what kind of wild ride Bitcoin investors are in for.
Regulatory uncertainty also poses a risk.
“In 2021, China, the world’s second largest economy, effectively made it illegal for citizens to mine or hold any cryptocurrency,” says Rodriguez.
If other countries follow suit, Bitcoin holders could be in hot water.
Cybersecurity is another major concern for all holders of digital assets. Remember that your transactions are only as anonymous and secure as your wallet information and password.
How to keep Bitcoin safe
Your Bitcoin’s security largely depends on how you store it. Your choice of crypto wallet 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.
He says that offline “cold” wallets that are not connected to the internet are safe from hacking, but less convenient than hot wallets. Cold wallets are also susceptible to theft or loss. “Lose a device or drive or misplace your private key, you’ve got a problem,” says Burke.
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 sensible strategy is to use a combination of hot and cold storage, where most assets are kept in cold storage,” says Burke.
Burke adds that whatever storage method you choose, make sure you know if your crypto is being loaned, staking 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 end 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 are buying BTC as part of your investment strategy, prepare for ups and downs.
