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Is cryptocurrency safe? It’s a legitimate question and because crypto has rapidly gained popularity as an alternative investment, it’s one worth answering. As more people explore the world of crypto, it's crucial to understand the risks involved and learn how to invest safely.
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Is crypto safe?
When discussing the safety of cryptocurrency, this question can be understood in two ways:
- Is crypto a risky investment?
- Does crypto have security risks that I should know about?
Since we’ve addressed crypto’s volatility in previous articles, this article will focus on the second question.
Are there security risks associated with cryptocurrency?
Yes, cryptocurrency has security risks that you should know. Here are a few examples:
1.) Hacking and cyberattacks
Cryptocurrency exchanges are frequent targets for hackers. High-profile breaches have resulted in losses worth millions of dollars. There’s a never-ending battle between hackers and cybersecurity teams as businesses divert resources to stay ahead of today’s greatest threats.
2.) Lack of regulatory protection
Crypto is still a developing space with less regulatory oversight compared to traditional financial systems. Payments with debit and credit cards offer specific security features that crypto sometimes may not. For example, fraudulent transactions done under your name could be disputed and refunded by your credit card company. In contrast, crypto transactions are irreversible, meaning that if a payment is made, it cannot be undone.
3.) Transactions are irreversible
On the topic of irreversible transactions, you can usually only get your payment back if the recipient voluntarily returns it. Because cryptocurrencies use blockchain technology to create a secure financial environment, transactions are generally not reversible or editable.
4.) Your keys are your own
Private keys are phrases and words acting as cryptographic keys that grant access to a crypto wallet. If a crypto user loses their private keys, they’ll lose access to their funds permanently. Unlike passwords, private keys cannot be recovered if lost. At the same time, if a suspect third party has stolen your private keys, they’d have access to your funds.
What’s the most secure way to buy cryptocurrency?
As a general rule, safe online platforms require you to prove your identity, following Know Your Customer and Anti Money Laundering guidelines.
Popular crypto exchanges require customers to verify information about themselves before they gain access to certain features. For beginners looking to get into crypto, it’s best to stick with exchanges or platforms that take security seriously.
How to securely store crypto
Blockchain technology provides some inherent security features. Hash codes and timestamps make it nearly impossible to alter the data in a block once it’s been added to the blockchain.
However, because transactions are irreversible, it’s best to make sure your cryptocurrency is kept safe from the outset - and this can be done by securely storing your cryptocurrency, here’s how:
Hot storage
Hot wallets are crypto wallets with a connection to the internet. They’re usually software that stores your private keys on a device or exchanges them connected to the internet. With hot wallets, investors can store, send, and receive their tokens.
Because they’re connected to the internet, hot wallets offer ease of use and accessibility for investors. It’s as simple as grabbing your phone or computer and getting online. However, these wallets are always online, making them vulnerable to attacks. For this reason, smart crypto investors use hot wallets much like checking accounts - ideal for spending and quick transactions, but not for long-term storage.
Cold storage
On the other hand, cold storage options remain offline in perpetuity. They require an investor to buy a cold storage device and download the corresponding software on their PC. When setting up your device, make sure to save your recovery (seed) phrase because if you forget it, your cold wallet could format itself after multiple failed attempts.
While cold storage is the safest way to store your crypto away from online hacks and security breaches, you now introduce the potential for physical damage - such as water or fire - that could destroy your device and render your crypto irretrievable.
A Quick Reminder
Whether you use a hot or cold wallet, it will always have two key components: the private and public keys.
- Public keys:
Similar to a bank account number, your public key is used to identify your account when interacting with others.
- Private keys:
Private keys are unique, sophisticated codes generated through complex cryptographic processes that verify token ownership. You can initiate and validate transactions in the crypto world via the private keys. Always ensure your private keys are stored securely.
