By now, you’ve almost certainly heard of cryptocurrency, even if you aren’t already using it. While it is one of the newest asset classes, it has gained millions of users worldwide, as well as support for institutions and governments. Investors have flocked to crypto assets, whether that’s buying established ones like Bitcoin or investing in presale tokens. From gaming coins to meme coins, people are eager to buy, as Alan Draper explains, the newest crypto coins. Even with all this, many still wonder about just how safe these tokens are.
After all, how safe can cryptocurrency be if it is that new? The truth is that just like any other currency or investment vehicle, there are risks to be aware of a safety precautions to take. In this article, we explore crypto safety.
What is Crypto
To understand the risks and safety of cryptocurrency, it is important to know what it is in the first place. Cryptocurrency refers to digital currencies that are based on blockchain technology. Blockchain refers to distributed ledger technology on which transactions are processed and recorded. Instead of the computer power of a blockchain network concentrated with one single entity, it is distributed across thousands of devices that confirm transactions in exchange for crypto. This means that no single entity controls a public blockchain, not even the creators. And unlike traditional currency, cryptos are not issued by central banks but by individual projects.
Risks Associated With Crypto
With an understanding of crypto, it is worth looking at the risks that come with them.
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Volatility
This is one of the biggest criticisms of cryptocurrency as its value is driven by the forces of demand and supply. But unlike a fiat currency, its demand is less stable, meaning that crypto tokens can see drastic spikes and declines in a short amount of time. Take 2020, for example, when the value of Bitcoin fell below $10,000, only to rise to over $60,000 months later. While this means that crypto investors can enjoy impressive gains in a short time, their tokens can also tank quite quickly. It also impacts crypto’s efficiency as a currency.
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Theft
Because crypto assets are so valuable, they are often targeted by criminals looking to rob investors. From everyday people to even rich celebrities, many people have had their wallets broken into and their tokens stolen. These have typically been done through phishing schemes, which promise free tokens or other prizes via shady links. Some criminals have even gone as far as impersonating or hacking into the accounts of well-known people or institutions to get people to click their links. Once the victim is convinced to click the link, their crypto wallet is compromised and their tokens are stolen.
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Scams
Any asset market is bound to have scammers looking to prey on people and the crypto space is no different. Regulators around the world have put out warnings regarding fake crypto investment schemes that promise high returns, only to make off with investors’ money. Then there are fake tokens and pump-and-dump schemes where investors are tricked into buying a token that does not exist at all or is worthless. In either case, the victim is left with no investment and less money.
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Token Loss
The nature of blockchains means that once a transaction is confirmed, it cannot be reversed. Similarly, crypto wallets can only be accessed using a password and/or recovery/seed phrase and if these are lost, even the wallet makers cannot break into them. There have been several instances of people losing crypto wallets with millions of dollars in them, CEOs passing away with customer funds locked in wallets, and people simply sending tokens to the wrong address. These show the fragile nature of digital assets and the need for caution when using them.
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Legal Repercussions
It is important to remember that cryptocurrency is not legal to use everywhere in the world. Places like China have banned them and being caught using crypto could come with serious legal repercussions. On top of this, you’ll have to adhere to the ever-changing laws regarding paying crypto tax. Paying tax on fiat currency is complicated enough but keeping track of how much crypto tax to pay and whether or not you even owe any tax can be daunting.
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Network Attacks and Hacks
As we’ve explained, crypto networks are very secure but this does not make them infallible. There is the possibility of a 51% attack, in which a single user gains a majority of the processing power of a network and can do damage to the ecosystem. While this is quite rare, it is something to keep in mind. On top of this, crypto exchanges and other such platforms have been targeted by criminals in the past and billions of dollars have been stolen so far. While they don’t happen everyday other day, they pose a risk to crypto users.
How to Practice Crypto Safety
While cryptocurrency comes with some unique safety concerns, there are ways to use these assets while protecting yourself.
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Token Storage
This is one of the most important steps to take as it can prevent both token theft and loss. Choose a crypto wallet (preferably a cold wallet) and make sure your password and recovery phrase are kept safe. As a rule, do not use your crypto exchange of choice as a substitute for a proper wallet as this puts you at risk (‘not your keys, not your coins’ comes to mind). Also, make sure you don’t click on shady or unverified links.
Also, as you send crypto from one wallet address to the other, make sure to double-check to avoid token loss.
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Investment Strategies
While it is admirable to try and make a profit from crypto, you have to be cautious. Don’t invest any money you cannot afford to lose and don’t buy into any opportunity without doing your research. Make sure you invest in projects and platforms that have been vetted by insiders and have legitimate use cases. If a project or token is shrouded in secrecy and you can’t find any information about the people behind it, it might be a sign to avoid it.
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Legal Use of Crypto
To avoid falling on the wrong side of the law, you should look into the regulations for crypto in your country. If using crypto is legal, make sure you pay all the necessary taxes on your crypto transactions as when due. If cryptocurrency is not legal in your country, you might want to refrain from using it to avoid getting into trouble.
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Computer Safety
Ultimately, a big part of crypto safety is practicing overall computer safety. That means installing anti-virus software, not downloading strange programs that aren’t verified, and using passwords to protect your device as much as possible.
Conclusion
Cryptocurrency has proven to be an innovative technology that gives a world of benefits to those who invest in it. But like every type of currency or asset, it comes with its own challenges. It is often targeted by criminals, is often volatile, and can be subject to loss and error. But as we’ve highlighted in this article, there are several steps you can take to protect yourself and your assets.
