With the recent collapse of FTX, a lot of people are probably thinking: Is crypto safe? Should I invest in crypto? Is there a way to stay safe despite investing in an asset as risky as this? Understandable concerns. But access to the right information can determine whether you’re safe or sorry to a large extent. That’s why, through this article, we hope to share everything we know about investing in crypto safely.
What are the risks associated with crypto?
Crypto is no cakewalk. Like all things in life, it comes with its share of risks. And you need to do the work of learning to navigate them. Some of the main risks are:
Crypto prices move up and down very quickly. There are a few simple reasons for that. First, crypto is an emerging asset. Compared to the stock markets, which are valued at multiple trillion dollars around the world, crypto was barely above $1 trillion during the biggest bull run in history. This means relatively little capital is needed to move the prices of cryptos. Stock markets, on the other hand, are stabler because of the insane amount of capital movement needed for price movements. Another reason for its volatility is that there is nothing physical backing crypto. Read more about it here.
Not only do traders may find it hard to make a profit due to the regular volatility, but they may also have to deal with market manipulation more frequently than with other assets.
Crypto is still unregulated in most parts of the world. That means sudden law enforcement or tax-related governmental actions is always a possibility. When such new regulations are drastic—for instance, when bans are involved—it could even put the future of the asset itself in danger within that jurisdiction. Even milder regulations—such as those involving taxation—can translate into volatility and, therefore, risk.
Scams and hacks
Cryptocurrencies, surprisingly, can be hacked. One of the biggest crypto heists in history involved the Ronin Network, a gaming crypto which lost more than $600 million in ETH tokens and close to 25 million USD earlier this year. In the case of Ronin, according to the developers, the user base supporting the coin swelled to an “unsustainable size,” and that made the security breach possible. In addition to such hacks, cryptos experience scams where people are lured in with too-good-to-be-true claims.
Is crypto really safe?
As we have seen above, crypto comes with its own share of risks—just like all other assets. When thinking about the safety aspect of crypto, instead of asking if crypto is safe, it is better to ask:
- How safe are crypto transactions in comparison to other assets?
- Do I want to risk getting involved in crypto, given my risk appetite?
To some extent, we have helped you answer the second question by listing out the risks involved. So, let’s talk about the former here.
Crypto, as you probably know, relies on blockchains. Blockchains are essentially immutable ledgers that run on a network of computers. These blockchains/ledgers store a record of all transactions on the network. It is a public ledger—-that is, anyone on the network can access it and find a version of the record that has been updated in real-time.
Any modification to the blockchain chain outside of verification requires the consent of 51% of the network. Since reliable cryptos have a lot of computers on the network, this 51% translates into a pretty huge number. The point is that it is very unlikely that many computers would agree to modify the ledger. That means crypto is safe, so long as you do your research and ensure that you are putting your money into a good project.
After you buy crypto, its safety depends on you, too, to a large extent. Research wallets thoroughly before choosing one, and keep your private key safe. Learn all about hacks and scams before starting your investment journey.
Also, safety starts with your purchase. So, when you’re buying crypto, you’re technically investing in the underlying project. Without development, more dependence on Ethereum, and an increase in manageable traffic, other people won’t buy ETH coins, and prices won’t go up. So even if something like the Ethereum Merge upgrade does not have a direct impact on price, it will in the long term because it makes the project better. Keep this in mind and choose your projects wisely.
How to invest in crypto safely
Although investing in good cryptocurrency projects is largely safe, it won’t hurt to have a few tricks up your sleeve for a rainy day, right?
Use a secure device and use it safely
Cryptocurrencies are all digital. The only way you can use it is through a smart device. Make sure your device is equipped with basic modern security features, including a good antivirus program.
In addition, always use secure passwords, avoid unprotected WiFi networks, and stay up to date on security patches. So long as you use a secure network, most of your activity on the internet is secured with 256-bit encryption. That means hackers would take ages to find your data fast enough to use it.
Connect via a Virtual Private Network (VPN)
A VPN is a service you should use while making transactions online—whether or not it involves crypto, but especially when it does. If you ever need to access your crypto wallet on a public network, a VPN protects you from third-party attacks. It does this by masking your information from people who don’t need to see it.
Get a good wallet
Although exchange wallets are mostly safe, it’s better to invest in a wallet if you have a lot tied up in crypto. You could opt for hot or cold storage, depending on your needs.
A hot wallet is generally suited for crypto enthusiasts who interact with their stash a lot and those who trade regularly. Hot wallets are connected to the internet, which is what makes them very accessible.
Cold wallets, on the other hand, are the offline route to storing your crypto. They come in a variety of forms—from a hardware one like the one by Ledger or a simple paper wallet, where your private key is written on a piece of paper with a pen. A cold wallet is safer because it is offline, but it is inconvenient if you do not plan to HODL for long.
Keep your goals modest
First things first, don’t invest money you can’t afford to lose. Even the best-known cryptos can be pretty risky.
Second, having really high expectations as a new crypto investor could make you a sitting duck for scammers and fraudsters. Just because ETH returned 500% profits in the last 10 years doesn’t mean it still will. It’s too big to grow that fast now. The opportunities for insane short-term gains have become fewer and further between. So remember that while making your investments.
Third, you could maximize your chances by keeping your eye on your long-term plan. Don’t let the daily volatility drive your trades.
You could also look at some of these risk management strategies to keep losses in check.
Barclays, the second-largest bank in the United Kingdom, is trying to streamline its processes by investing in blockchain technology, and VISA, one of the world’s largest payment facilitators, has partnered with blockchain companies. So crypto, which uses this same technology, is also pretty secure. But it is also just like any other asset—safe if you keep it safe. When investing in crypto, always remember: You’re investing in the project blockchain, not the coin.