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Is Bitcoin Safe?
By Cassidy Horton MONEY RESEARCH COLLECTIVE
Bitcoin (BTC) is a digital currency that’s often lauded for its potential to provide a more efficient and secure way of conducting transactions. However, it’s also very volatile, which has led some to question its viability as a currency and an investment.
So is Bitcoin safe? As with most things in financial services, it depends on your situation. So let’s run through some potential risks to help you decide if this trending asset is worth your time.
Table of contents
- Is Buying Bitcoin Safe?
- How to Identify Bitcoin Risks
- How to Secure a Bitcoin Wallet
- Is Bitcoin Safe FAQ
Is buying Bitcoin safe?
Firstly, what is Bitcoin? Bitcoin is a decentralized currency. This means that unlike traditional assets (such as stocks, ETFs, and bonds), it isn’t regulated by any government or financial institution. Instead, it relies on a peer-to-peer network — called the blockchain — to verify transactions.
Naturally, this lack of oversight makes Bitcoin riskier than other types of assets. Still, it’s possible to see investment returns if you understand its nuances.
Crypto’s inherent volatility
The first thing you need to understand about cryptocurrency is that its value can fluctuate wildly.
For instance, Bitcoin hit an all-time high of $64,400 (USD) on November 12, 2021, only to come crashing down to $35,070.10 (USD) on January 21, 2022 — just two months later.
Economists have characterized Bitcoin as a “speculative bubble” at various times. And as such, it’s recommended to keep no more than 6% of your portfolio in crypto if you wish to buy at all.
Is Coinbase safe?
Coinbase is a U.S.-based cryptocurrency exchange and wallet provider, with over 89 million global users. It’s one of the most popular ways to buy and sell Bitcoin, Ethereum, Litecoin, and many other cryptocurrencies.
The platform has implemented multiple layers of security to keep your investments safe, including two-step verification, cold storage, and a host of other security measures. Even today, Coinbase reports it’s “the only crypto exchange to have never been hacked.”
Is Bitcoin a good investment?
Bitcoin is a bit of the Wild West when it comes to investing. However, it could be a good choice for anyone who understands (and accepts) these two facts:
- It’s highly volatile. First, Bitcoin has a checkered history of drastic rises and falls. Those with Bitcoin investments need to be able to stomach the emotional and financial rollercoaster that comes with it.
- It’s speculative. Some individuals already question whether it’s too late to invest in crypto. And although many believe a bright future still lies ahead, there’s no guarantee Bitcoin will be around for the long haul.
If you’re not sure if Bitcoin is right for you, find a financial advisor or expert who can help you decide.
How to identify Bitcoin risks
There’s no doubt that Bitcoin is one of the hottest investments around right now. But before you jump on the bandwagon, it’s important to be aware of the risks involved, so you can protect yourself from potential losses.
Fake cryptocurrencies
Just as there are fake versions of the U.S. dollar, there are also fake versions of Bitcoin and other cryptocurrencies. These fake coins are often created by scammers to trick people into investing in them.
So, how do you know if a cryptocurrency is real or fake? According to the Federal Trade Commission (FTC), you should look out for these red flags:
- Coins that promise to give you free money or have guaranteed returns.
- Coins that don’t have a website or whitepaper tied to them.
- Coins with anonymous teams behind them.
If you come across any crypto scams, you can report them to the FTC at ReportFraud.ftc.gov.
Pump-and-dump schemes
Another risk to be aware of is pump-and-dump schemes. These are implemented when a group of people buys a specific cryptocurrency all at once to artificially inflate the price. Then they sell it for a profit.
While pump-and-dump schemes are illegal in the traditional stock market, they can be quite common in the cryptocurrency world. And once the price starts to drop, investors who bought in at the inflated price often lose a lot of money.
So if you see any of these signs happening, you may want to avoid that particular coin:
- There is sudden and unexplained price growth.
- There is a lot of hype or excitement around the coin.
- People are trying to get others to buy the coin.
Threat of hackers
Hackers and scammers are also a major threat in the world of Bitcoin. Due to the decentralized nature of the currency, there is no central authority to protect against attacks.
As a result, Bitcoin exchanges and wallets are often targets for criminals who are looking to steal funds. In fact, the first major cryptocurrency heist came in 2011 after hackers stole over $8.75 million worth of Bitcoin from Mt. Gox — the largest Bitcoin exchange at the time.
Since then, dozens of cryptocurrency attacks have happened. However, there are steps you can take to protect your Bitcoin investments:
- Use a secure crypto wallet.
- Set up two-factor authentication.
- Keep your software up to date.
- Don’t click on links from unknown sources. (These could be phishing attempts.)
- Avoid trading Bitcoin or checking your account on public Wi-Fi.
Uninsured brokerage accounts
Another way to protect your crypto against cyberattacks is to choose a trading platform that’s insured. When a platform is insured, it guarantees you’ll get all (or some) of your money back if a large-scale breach happens.
For instance, this actually happened to Bitmart in 2021 when real-world hackers stole $196 million from the platform. Because it had insurance, victims got reimbursed for their losses.
That said, insured brokerage accounts don’t offer 100% protection against theft. If someone steals your personal credentials due to your own self negligence, you’ll most likely be on the hook for losses.
Poor security and privacy settings
Due to the lack of regulation in the cryptocurrency space, exchanges, and wallets often have weak security measures in place, leaving them vulnerable to attack.
When shopping around for a crypto trading platform, look for one that has features like two-factor authentication and time-locked transactions to protect against cyberattacks. Avoid ones that aren’t transparent about how they keep your data safe.
How to secure a Bitcoin wallet
As you can see from the risks above, security is paramount when it comes to storing Bitcoin. With that in mind, let’s look at some different storage methods (AKA: crypto wallets) you can use to keep your coins safe:
Software wallets
Software wallets, also known as online wallets, are the most common way to store Bitcoin. They’re convenient because all you have to do is install an app or navigate to a website to use them. But this easy accessibility also makes them more vulnerable to attacks.
Offline wallets
An offline crypto wallet, or cold wallet, is known to be a safer alternative to a software variety because it isn’t connected to the internet. Rather, it’s stored directly on your device or on a physical object you keep in your possession.
However, offline wallets are also more difficult to use, because you need to store the private keys offline. Someone can also physically steal it from you if it’s not stored securely.
Hardware wallets
A hardware wallet is a physical device (such as a USB stick) that stores Bitcoin and other cryptos. Hardware wallets are considered to be the most secure type of wallet because they aren’t connected to the internet and are therefore less susceptible to being hacked.
But they’re also easy to misplace or have stolen. They can also be more cumbersome to use because you have to connect them to a computer first.
Wallet services
Wallet services are offered by some platforms as a way to get you trading crypto right away. The downside is that their ease of use makes them the riskiest type of wallet.
If you use a wallet service, set up every security measure possible in the app to secure it — and consider moving to an alternative wallet as soon as you can.
Paper wallets
Paper wallets are literal pieces of paper that have your private keys printed on them. They’re not connected to the internet, so they can’t be hacked.
However, they’re insanely easy to lose. (Just think about how many times you’ve misplaced a piece of paper.)
For this reason, paper wallets are not generally recommended unless you’re gifting crypto to someone or you’re buying a small amount of coins. And even then, you need to keep it in a safe or safety deposit box where it can’t get lost.
Multisignature wallets
As the name implies, multi-signature wallets require multiple people to sign off on a transaction before it’s processed. And because keys are stored both offline and online, it makes them almost impossible for criminals to get ahold of.
Is Bitcoin Safe FAQ
How much should you invest in Bitcoin?
How do I buy Bitcoin?
What is the blockchain and how does it work?
Bottom line: Is Bitcoin safe?
While the price of Bitcoin has seen dramatic highs and lows over the past few years, it remains to be seen whether it will stabilize enough to become a mainstream form of payment.
In the meantime, many people are still cautiously optimistic about the future of Bitcoin.
If you decide to add Bitcoin to your investment portfolio, be sure to find a secure exchange and take preventative measures to keep your wallet safe. And because it’s so speculative, don’t invest more than you’re willing to lose.
Cassidy Horton is a finance writer based in Seattle, Washington. With an MBA and a bachelor's in public relations, her work has been published over a thousand times by The Balance, Finder.com, Money Under 30, Clever Girl Finance, and many more. Cassidy is a self-confessed money nerd who’s passionate about helping people find financial freedom. Oh, and she really loves cats.