One of the biggest questions by people new to crypto about cryptocurrencies is whether they're secure. This is a valid concern, especially since more and more people are starting to trade in cryptocurrencies, and governments are still working out how to regulate them.
However, the question of whether cryptocurrencies are safe is complicated. Before you start trading in cryptocurrencies, you must understand that they come with inherent security risks. For example, the value of cryptocurrencies can be very volatile and can change quickly and dramatically. Additionally, the cryptocurrency market is still relatively new and not regulated, making it a target for scammers looking to take advantage of inexperienced traders.
Despite these risks, there are also some advantages to using cryptocurrencies. In this article, we'll go over some of the key things you should know before you go into crypto.
Cryptocurrency investments can raise two distinct concerns that individuals might want to consider.
Firstly, investments in cryptocurrency might be prone to volatile fluctuations, which could lead to rapid asset depreciation.
Secondly, investing in cryptocurrency poses security vulnerabilities that expose you to financial losses through scams or fraudulent activities.
To better understand these concerns, let's consider each of them separately.
Is investing in cryptocurrency safe?
Cryptocurrency investing is considered highly risky compared to more traditional asset classes like stocks and government bonds. While cryptocurrencies are generally legal throughout Europe, many aspects remain unregulated, making them vulnerable to evolving regulations.
With numerous governments worldwide deliberating on how to respond to the rise of cryptocurrencies, many factors could contribute to the ongoing volatility of the crypto market.
The newness of cryptocurrencies in the financial landscape is partly responsible for their inherent volatility. Investors may grapple with uncertainties regarding its value as a relatively new asset class.
Cryptocurrencies lack extensive historical data to anchor their worth, making them susceptible to significant price fluctuations driven by changes in investor sentiment. Even Bitcoin, the largest and most established crypto asset, is notorious for its erratic price movements.
If you're considering cryptocurrency investments, it's important to approach cautiously. Limiting your investments to an amount you can afford to lose helps mitigate risks.
However, it's essential to acknowledge that any crypto asset can experience drastic devaluation within a single day. Diversifying your portfolio, with cryptocurrency representing a smaller and more speculative portion, can offer a prudent approach to managing risk.
Are there any security concerns linked to cryptocurrency?
Understanding security vulnerabilities is crucial. Let's explore these vulnerabilities in detail.
- Cryptocurrency does not have the same legal protections as traditional debit and credit card transactions.
Unlike fiat transactions, which offer specific security measures, crypto transactions may leave you more vulnerable. For example, you may not be held responsible for unauthorized purchases on your card. Still, this protection is typically unavailable in cryptocurrency. In case of a scam, recovering your funds may be extremely difficult, if not impossible.
- Cryptocurrency scams are everywhere, and you might have encountered some.
For instance, you may have received an email that threatens to share your compromising photos unless you pay in Bitcoin. Alternatively, you might have received a message claiming you've won a valuable NFT or a significant amount of cryptocurrency. These are just a few examples of the scams that exist. In essence, if someone insists on crypto payment only and disregards other forms of payment, it's a scheme to cheat you.
- Once a cryptocurrency transaction is initiated, it cannot be reversed.
Cryptocurrencies use blockchain technology to create a secure and transparent record of transactions. This technology improves transparency, but it also means that transactions are usually irreversible and unchangeable. If something goes wrong after you've paid, there's usually no way to get a refund through customer service.
What is the safest method for buying cryptocurrency?
The popularity of cryptocurrency has led to a rise in online exchanges and marketplaces that facilitate crypto transactions. To prioritize safety, these platforms require users to verify their identity through Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols.
Some prominent cryptocurrency exchanges require customers to undergo identity verification procedures before accessing certain trading functionalities. For beginners entering the world of crypto, it is advisable to choose exchanges that prioritize security measures and identity verification.
Learn more about buying cryptocurrency in Tangem Wallet.
What's the safest way to store cryptocurrency?
The best way to keep your cryptocurrency safe is by storing it offline, away from online threats. You can use a hardware wallet, also called a "cold wallet" or "cold storage," to achieve this. Digital wallets, also known as "hot wallets," whether online or on desktop, are more vulnerable to cyber theft. Crypto hardware wallets come in various types, including credit-card shaped wallets from trusted brands like Tangem.
Learn more about hardware wallets and Tangem.
What is the most secure cryptocurrency?
No cryptocurrency can be considered the most secure. Bitcoin and Ethereum are known for their decentralized blockchain technology, making them more secure. They are also more widely used than other alternative cryptocurrencies. This can help reduce major price fluctuations.
It is important to note that security is a vital aspect of decentralized blockchain technology. Bitcoin was created to provide buyers and sellers with better security in transactions. This eliminates the need for a trusted intermediary.
5 things to consider before investing in cryptocurrency
Before buying or selling crypto, it's worth understanding some of the key risks of cryptocurrency. Here's 5 points worth considering:
- Blockchain technology is in its infancy.
The blockchain's cryptographic foundation, combined with a decentralized peer-to-peer network for transaction validation, inherently provides certain security advantages. Data within a block is secured through encryption via hashes and timestamps, making alterations virtually impossible once recorded on the blockchain.
- Cryptocurrency prices are very volatile.
Cryptocurrencies are known for their instability, with values fluctuating dramatically over short periods. It's not uncommon for prices to surge or plummet by double-digit percentages within hours. Remember, past performance is not necessarily indicative of future outcomes, especially with risky investments like cryptocurrencies. Be cautious and avoid investing more than you're willing to lose.
- The rise of cryptocurrency scams presents a pressing issue.
Scammers use many tactics to trick people into giving them their private keys, which can lead to unauthorized access to their crypto holdings. Some of these tactics include fake applications, crypto wallets that are not what they seem, and phishing emails. Moreover, NFT scams are becoming more common, often involving fake accounts with fake identities or promises of royalties that never come true. Some cryptocurrencies themselves can also be scams. The Squid Game token is an example of this, as it prevented many holders from trading their tokens, which shows how risky the crypto world can be.
- Cryptocurrencies operate within an unregulated landscape.
Despite efforts in various jurisdictions to impose regulatory frameworks, they remain less regulated compared to traditional asset classes. Should a platform facilitating the exchange or custody of your crypto assets face insolvency, there's a possibility of losing your entire capital. Similarly, the security of your assets is jeopardized in the event of a hacking incident targeting the exchange holding your cryptocurrencies.
Furthermore, the taxation of cryptocurrencies is still in its early stages, with potential future changes carrying significant implications for your investment strategies.
- Diversifying your portfolio is crucial.
With thousands of options available, many of which are still in their nascent phases, discerning the eventual victors from the also-rans remains challenging.
As with any speculative venture, consolidating all investments into a single avenue is not advisable. For those considering cryptocurrency investments, diversifying across a spectrum of different cryptos may offer a more prudent approach.
3 strategies to ensure the security of your cryptocurrency:
Taking a cautious stance can assist in sidestepping many of the prevalent risks linked to cryptocurrency. Below, we present our key recommendations for navigating away from potential pitfalls.
- Before purchasing cryptocurrency, conduct thorough research on the exchange platform.
Previously, certain cryptocurrency exchanges have faced detrimental cyberattacks. It's advisable to opt for an exchange equipped with robust security measures, alongside competitive fees and user-friendly interface. Conduct thorough research on the chosen exchange and seek feedback from other users before initiating any transactions.
- Conduct research before investing in any cryptocurrency.
Make sure to read the whitepaper of the cryptocurrency. It's a fundamental step for any new currency, serving as a guide to comprehend its use cases, scalability, and the creator's vision for the future. Additionally, consider participating in online cryptocurrency forums to gather insights and tips that complement your research efforts. Internet searches can also provide valuable information regarding a cryptocurrency's track record and reputation.
- Secure your cryptocurrency by storing the most of it in a reliable cold wallet.
Keeping the majority of your cryptocurrency in a secure wallet provides a layer of defence against theft. Employing a hardware "cold" wallet can further reduce the likelihood of your cryptocurrency being compromised by online hacks.
FAQ
1. How secure are cryptocurrencies compared to traditional forms of currency?
Cryptocurrencies offer unique security features due to their decentralized nature and cryptographic encryption. However, they also face certain risks such as hacking and scams which differ from traditional currency security concerns.
2. What are the main threats to the security of cryptocurrencies?
The primary threats to cryptocurrency security include hacking of exchanges or wallets, phishing scams, malware, and vulnerabilities in the underlying smart contract that governs any particular cryptocurrency.
3. How can I ensure the safety of my cryptocurrency investments?
To safeguard your cryptocurrency, it is essential to use reputable hardware wallets. You should also enable multi-factor authentication (MFA), keep your private keys or seed phrases secure, regularly update your crypto app software, and stay vigilant against phishing attempts.
4. What are the differences between hot wallets and cold wallets in terms of security?
Hot wallets are connected to the internet and are more susceptible to hacking, whereas cold wallets store your wallet's private keys offline, providing enhanced security against online threats.
5. Is it safe to invest in new or lesser-known cryptocurrencies?
Investing in new or lesser-known cryptocurrencies carries higher risk due to potential security vulnerabilities, lack of regulation, and the possibility of scams. It's important to conduct your own thorough research and exercise caution before investing.
6. Can cryptocurrencies be hacked?
While cryptocurrencies themselves cannot be hacked due to their cryptographic nature, exchanges, wallets, and other infrastructure associated with cryptocurrencies can be vulnerable to hacking attempts.
7. What should I do if I suspect unauthorized access to my cryptocurrency wallet accounts?
If you suspect unauthorized access to your cryptocurrency accounts, immediately disable access, change passwords, and report the incident to the platform's support team.
8. What steps should I take to recover lost or stolen cryptocurrencies?
Recovering lost or stolen cryptocurrencies can be challenging due to their decentralized nature and irreversible transactions. However, you can seek assistance from law enforcement, hire forensic experts, or use blockchain analysis tools to trace and potentially recover your assets.