As is the case with any other investment, Bitcoin is not free of risk. But the debate on whether Bitcoin really is a safe investment has gained global attention due to the frequency and scale of attacks launched against the pioneer cryptocurrency. A recent crypto crime report from Crypto Head states that digital currency crimes have increased by 312% per year since 2016.
Of these, Bitcoin accounts for the largest number of crime reports. The incidence and investment loss from these Bitcoin crimes have soared in the recent past. But when you compare the Bitcoin crime trendline and its adoption and price charts, it all makes sense. You realize that as Bitcoin’s popularity and value rose over the year, so did its appeal to criminals, which then translates to an increased number of attacks against the currency, which in turn stirs the Bitcoin safety debate.
One must also appreciate that over the years, Bitcoin ecosystem players, especially the crypto exchanges, crypto experts and developers, and wallet developers, have played a critical role in promoting safe Bitcoin investments. They have put in place safeguards to protect investor assets and rolled out safety awareness campaigns.
More, however, remains to be done. You have control over some and no control over others. The best you can do is learn about all the risks associated with BTC investments and learn how to protect your assets from each.
Safety Factors To Consider When Buying Bitcoins (BTC)
For starters: You need to appreciate that Bitcoin is a risky investment.
Given the volatility of Bitcoin prices, celebrity Investor Mark Cuban likens it to gambling. And like with gambling, you need to know your risk tolerance beforehand and use it to determine the portion of your investment portfolio that goes into Bitcoin investing. Ideally, this should be the amount you can afford to lose. Further, its loss shouldn’t have any significant impact on your retirement plans or achievability of other life goals - with most experts advising that you allocate at least 5% of your portfolio to crypto.
Cuban also advises that you be “mentally prepared and financially prepared” and ready for Bitcoin price’s frequent crashes. And if you are new to crypto investing, the Morgan Creek Digital Assets co-founder and Bitcoin investor Anthony Pompliano advises that you “start very small, do research, and learn about it.”
What Are The Risks Associated With Bitcoin (BTC) Investment?
The two biggest risks associated with Bitcoin investments - and any other crypto for that matter - are the risk theft and volatility risks.
Today, there are numerous ways in which your Bitcoin investments could be stolen. The most common involves a criminal hacking your crypto wallet and transferring your Bitcoins to another wallet. It could also involve them hacking a Bitcoin exchange that stores the digital asset on your behalf and emptying their crypto storage, as it happened with the infamous Mt Gox exchange hack.
Hacking presents the biggest and most lethal threat to Bitcoin investing because there is only so much you can do to prevent it, especially if they target a crypto exchange.
The volatility risk of Bitcoin investments has also been a cause of concern for most investors. Bitcoin is quite sensitive, and its prices crash often, subsequently throwing many investors in the red regularly. In extreme cases, it could take between a few months and a few months to recover, but most individuals prefer to count their losses.
Unlike the risk of theft, which has no recourse, the volatility risk is amendable - especially for long-term investors. Bitcoin price history has shown that no matter how long it takes, it will always rebound and break above the last all-time high.
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Other Common Bitcoin scams
Fake BTC offerings
Today, everyone wants a piece of Bitcoin largely due to its soaring prices and attractive return on investment. Criminals understand and are thus using this to take advantage of naïve and gullible investors through online scams that promise to help them grow their Bitcoins or give free BTC to new investors.
The best you can do to avoid falling prey to these criminals is ignore any unsolicited offers, especially if they promise free Bitcoins. Remember, there is no magic trick to doubling your Bitcoin holdings, and no one is giving out free Bitcoins to strangers online.
Pump and dump schemes and price manipulation
Pump and dump schemes occur when an individual or group incites a fake price rally by pumping a lot of money to a cryptocurrency by buying a lot of the coin, effectively inflating its price. But just as the price peaks, they sell all their holdings. The decentralized nature and relatively high Bitcoin prices make a pump and dump scheme highly unlikely.
What we have here is price manipulation, where an individual presents themselves as an authority in Bitcoin. After gaining investor confidence, they buy low, make statements that suggest Bitcoin prices are bound to see the biggest jump, everyone jumps on board, this pushes BTC price up, and they sell at the new high price.
You can avoid this, too, by conducting proper research about the coin before investing and avoiding the herd mentality when it comes to crypto investments.
When hackers can't get to your wallet or exchange, they will infect your device with malware. This can be done remotely or physically. They will then use it to acquire login credentials for the wallet or crypto exchange account. And if this is not an option, they engage in ransomware by blocking access to the device and demanding payment in BTC to restore control over your device to you.
You can avoid this by avoiding clicking on suspicious links, using unsecured public Wi-Fi, and by investing in a reliable anti-virus for all your internet-enabled devices - including smartphones.
How To Keep Your Bitcoin Safe
Crypto security starts with being thorough on how you choose both the trading platform and the Bitcoin exchange.
Where possible, especially when holding substantial amounts of Bitcoins, avoid hot wallets - also known as online wallets. These are provided by crypto agencies as an added service in the form of free and non-custodial vaults, or independent third-party crypto storage service providers. The fact that they are online-based exposes you to such risk of losing your Bitcoin to hackers.
In the place of the free online wallets, consider the more secure and harder to hack hardware and paper wallets. Unlike free hot wallets. Hardware and paper wallets are cold wallets that store your Bitcoin private keys offline.
There is little you can do to prevent exchange hack or compromise by staff that results in the loss of your digital assets. This doesn’t, however, mean that you are helpless when it comes to Bitcoin exchanges.
For starters, consider registering crypto trader accounts with highly reputable trading platforms and ensure that they are registered and their founders/administrators known. Secondly, only create an account with a Bitcoin exchange if satisfied by the security safeguards it has in place. Where possible, only register with exchanges that have verifiable insurance covers for their client’s deposits.
Other measures that you can embrace to help keep your Bitcoins safe include enabling multi-factor authentication for access to both your wallet and crypto exchange accounts. Take advantage of all the security features provided by the exchange or wallet and complement them with unique passwords.
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Bitcoin Security Vs Privacy
There is a huge difference between Bitcoin security and Bitcoin privacy. While there are practical measures that you can take to keep your Bitcoins safe, there is nothing you can do to keep your private data and Bitcoin transaction history from prying eyes.
The Director of Data and Indexes at CoinDesk, Galen Moore, is quick to remind Bitcoin investors and traders that “You’re really not anonymous (when transacting Bitcoins online), more like pseudonymous.” It means that while transactions on the network don’t make it apparent who the BTC buyer or seller is, it still is possible to reverse engineer these transactions to reveal the identity of the trader/investor.
Bitcoin, like all other online and conventional investments, isn’t immune to risks. It's only that their frequency and scale have attracted global attention and spurred the debate on the safety of crypto investments. Some crypto analysts like James Ledbetter, editor and fintech newsletter FIN, feel that while there are legitimate fears about Bitcoin’s safety as an investment product, much of it has been “overblown.”
One must also appreciate the effort that the Bitcoin ecosystem players, especially the Bitcoin exchanges and wallet service providers, have put into keeping Bitcoins safer. They have introduced multiple security safeguards that, if aptly followed, guarantee the safety of this digital asset.
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