Bitcoin is one of the most secure assets. It uses cryptography, distributed ledger technology, and it’s basically unhackable. So, investing in Bitcoin should be super-duper-safe, right? Well, kind of yes but also — no. It depends on how familiar you are with the main risks and whether you know how to avoid them. We outlined the most crucial ones in this article.
This is What Makes Bitcoin a Secure Investment 🔒
There are 3 major reasons for Bitcoin security:
- Bitcoin uses cryptography: Bitcoin blockchain encodes and decodes information with cryptography. Simply speaking, the network turns information into a format that neither humans nor machines can read without a decryption key.
- Bitcoin is (almost) anonymous: though the ledger with all transactions is open for viewing, it does not show names or other personal details. In most cases, your privacy is completely protected.
- Bitcoin is decentralized: Bitcoin ledger isn’t stored in one place like your bank’s database. Instead, there are thousands of endpoints, called nodes, that hold an identical copy of the network. An imaginary attacker needs to compromise all of them if they are to change something in the Blockchain. Needless to say, that’s pretty much impossible.
Bitcoin is a transparent system that keeps personal details secret. No one can modify or delete records in the ledger, though everyone can see them.
But it’s Not All Positives
Nothing in this world is perfect. So the benefits we outlined go hand-in-hand with inherent risks.
You can reduce or eliminate some of the risks by taking the right actions, while others you just have to be aware of. Let’s go over them one-by-one.
1. Getting Locked Out 🔑
Roughly 20% of existing Bitcoins are forever lost. That’s an actual fact. Those are the Bitcoins whose owners forgot their private keys, and by doing that, lost control of the funds. Here are a few tips on how to keep your private keys safe:
- Regularly backup your wallet.
- But not just once: backup the backups!
- If you choose to store private keys on a physical medium (which you should), make sure to put that in a place you won’t forget. And also, away from kids or your dog.
- Don’t share your private keys with anybody. Unless you want to make those people co-owners.
3. Getting Phished 🕵️
It has to be said. The blockchain community is full to the brim with scammers. Cybercriminals can’t hack the blockchain, so they prey on natural human weaknesses. Like the wish to own more Bitcoins. And, preferably, to get them cheaply. Or for free. Unfortunately, some of the newer scams are more sophisticated than the good old “Give me your Private Keys and Receive 10 Bitcoins” email. Here are a few strategies that hackers use:
- They set up fake exchange websites that lure users with amazing terms. In reality, they collect personal information.
- And browse communities and offer insane profits tomorrow in exchange for a small investment today. An offer like this is a tell-tale sign of a scam.
- Some phishers set up ad campaigns and promise to reward users with Bitcoins for completing an action, like solving a quiz. Usually, they end up asking for personal details.
- Or send emails that urge you to click on a built-in link to receive a bonus. Really, those links redirect to compromised websites.
- Some emails look like threat messages from authorities like “you forgot to pay your taxes.” These normally come from scammers.
4. Paying Too Little Attention to Security
Bitcoin — and other cryptocurrencies for that matter — are purely digital. They don’t have a physical body, that an owner could keep under their mattress or in a banking vault. So, Bitcoin’s safety relies on digital security 100 percent. Take these basic security measures to ensure your funds’ safety:
- Use 2FA (2-Factor Authentication) if you wallet supports it. This is when a one-time pin code arrives to your phone in an SMS message every time you attempt a login.
- Actually, don’t use wallets without 2FA support in the first place.
- Create a strong and un-guessable password.
- Install reliable antivirus software and update it.
- Avoid unknown browser plug-ins. In fact, avoid suspicious software in general.
- Sign-up with your wallet provider using a brand-new email. Keep that email secret going forward.
Read our crypto security guide to familiarize yourself with more security rules.
4. Keeping Bitcoins Where You Shouldn’t 🙅
Many Bitcoin investors lost their crypto because they kept all their funds in an online or in an exchange wallet. Now, it’s important to note that most if not all exchanges allow you to store cryptocurrency. But all trading platforms provide so-called hot wallets. They are always connected to the internet and create a vulnerability that hackers can exploit.
And exploit they do. In 2019 alone, hackers cracked the biggest crypto exchange Binance, along with smaller Cryptopia, Bithumb, and many others. Binance hack alone costed users upwards of $41 million.
While exchanges are great for trading, they are not ideal for storing your funds. Instead, store your Bitcoins in a mobile or hardware wallet and you will be safe.
Also, read our guide on choosing a secure exchange. It will help you stay safe while trading.
5. Getting Hit by Volatility
A volatile asset is one that has an unstable price. That can be a good thing or a bad thing, depending on where market trends take the asset’s value. On one hand, it creates extra opportunities for significant short-term profits: you can buy a coin cheap and sell it in a couple of months when its price goes up. On the other hand, there is a risk that an asset will de-value. And sometimes sudden price drops are difficult to predict.
The only way to protect your assets against volatility is to study the economic principles behind cryptocurrency. Thankfully, we can help out.
6. Falling Victim to Regulation ⚖
Cryptocurrency is young. Many countries haven’t developed a consistent legal framework to go along with it yet. As a result, there are a lot of gray jurisdictions that haven’t taken a stance on crypto. Tomorrow they might classify it as an investment and tax holders or ban cryptocurrency altogether. Not ideal at all.
What’s more. some governments see Bitcoin as a Ponzi scheme and treat investors like fraudsters. Afghanistan, Pakistan, Bolivia, and Bangladesh are among the most hostile jurisdictions. Though, to be fair, if you are in one of those countries crypto should be among your least concerns.
If you are planning on investing a large amount in crypto and can see yourself frequently converging digital assets to fiat — get professional legal advice in your place of residence. Also, follow the news to keep up with the regulatory changes.
Positives Still Outweigh the Negatives. By a Long Stretch
We have covered the 6 basic risks you run as a Bitcoin user. Truth be told, it takes little effort to avoid most of them. And as for the risks beyond our control — they are likely to become less significant or disappear, as crypto becomes more popular. Anyway, these negatives are the underside of the benefits the technology offers us. And we think those benefits are definitely worth it.