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How safe really are cryptocurrencies?

(Image credit: Image Credit: David McBee / Pexels)

Some of the biggest cryptocurrencies have been around for almost a decade, but it is only over the last couple of years that they have started to go mainstream. At the end of 2017, crypto frenzy reached fever pitch. The price of Bitcoin reached almost $20,000 in mid-December, with more people than ever buying their own share. In the following months, media interest in cryptocurrencies continued to soar despite falling prices. Stories continued to emerge which called into question their legitimacy. 

The evident volatility of cryptocurrencies, even over such a short period of time, inevitably begged questions about their reliability as an investment. Meanwhile, large-scale hacks and apparent associations with nefarious activity raised concerns about their security in a more general sense. For those interested in investing in cryptocurrencies, if even on a small scale, it can be difficult to differentiate between sensationalist media coverage and genuine commentary on the state of the industry. 

Investing in cryptocurrencies inevitably involves an understanding of the market and, therefore, requires the answers to various questions about just how safe they really are.  

Are cryptocurrencies a safe investment?

In short, there is no such thing as a safe investment. There are certainly some investments that are safer than others, but for the most part, any investment has an element of risk. The volatility with which cryptocurrencies have fluctuated over the last 12 months certainly evidences a higher risk of loss, but it is also what has made them such a lucrative investment for so many people. Buying and selling cryptocurrencies does not have to be a high-risk activity if the trader understands the marketplace and is responsible about the way that they invest.  

There are a lot of cryptocurrencies to choose from at the moment, but not all have been created equally. Before buying into any cryptocurrency it is important to do some background research into who created the coin, whether it is being traded on safe exchanges, whether their screening processes are thorough and whether they are being endorsed by affiliation with recognisable brands. Taking all these precautions are critical before choosing to invest your hard-earned money.

Will my crypto get stolen? 

Aside from the ostensible risks associated to cryptocurrencies in terms of investment, their vulnerabilities against cyber-attack have also been a point of contention. As cryptocurrencies have become more popular, and therefore used by a much wider audience, they have inevitably become the focus of cyber-attack. There have been several high-profile cryptocurrency attacks over the last couple of years in which cryptocurrency owners have lost their coins and been unable to get them back. 

The commonality between these hacks is that the targets were public exchanges or wallets. Almost a third of cyber-attacks where cryptocurrency is stolen occurred when exchanges were compromised by hackers and the wallets associated with them drained. Many individuals lost their personal cryptocurrency last year during these hacks but there is a simple solution that makes these losses preventable. The best way to keep cryptocurrency secure is to store it on a ‘cold-storage device’ which sounds complicated, but essentially just means that it is offline.  

A common method of cold storage is to use a paper wallet or an external hard drive to store the address and the key needed to access the cryptocurrency. Ideally, cryptocurrencies and the corresponding information required to access them should only be connected to the internet during the time that they are being used for trading and should be disconnected afterwards. This is the best way to make sure that the cryptocurrencies are not at risk of being hacked.

Are cryptos being used by criminals?

On a much wider scale, cryptocurrencies have been called into question because of their alleged facilitation of criminal activity such as money laundering. Claims have been made that cryptocurrencies are affording criminals the anonymity they do not have using typical fiat currencies and bank accounts. In fact, the converse is true. The technology that underpins cryptocurrencies, blockchain, ensures that all transactions are traceable. 

Every time any amount of value is transferred, a record of the transaction is added to the blockchain which is virtually impossible to edit or manipulate. Money laundering typically uses complex trails of money movements to obfuscate the money’s point of origin and eventually turn it into an ostensible legitimate asset. This is not possible with cryptocurrency, because the trail of money is recorded and therefore always traceable. 

Until recently the fact that cryptocurrencies have been largely unregulated in an official capacity has led to wariness from potential investors. Several tier one banks and funds are becoming increasingly embracive of cryptocurrencies by choosing to recognise them as a legitimate asset. Up until this point, various financial institutions and cryptocurrencies themselves have been using FCA policy as a guide and self-regulating themselves to the same standard. This involves assessing customers to ensure that they are not planning to use cryptocurrencies to launder money or to facilitate any other type of nefarious activity by investigating the ultimate beneficial owner of each account. 

This self-regulation has recently been legitimised by the European Commission who earlier this year introduced the EU’s 5th Money Laundering Directive which entrenches the notion that all cryptocurrencies and their respective investors be subject to regulation in terms of money laundering. This is critical step forward towards wide and comprehensive regulation that will enhance the security and legitimacy of cryptocurrencies further still. 

Cryptocurrencies are not inherently unsafe. The technology that underpins them is consistently described as the most secure technology in existence. Self-regulation by financial institutions and cryptocurrency owners themselves, combined with recent policy developments led by the EU have further enhanced their legitimacy as international means of transferring value. On an individual level, cryptocurrencies can be excellent way to invest as long as the buyer is smart about the decisions they make and does their due diligence first. 

Enthusiasm from the cryptocurrency community and incremental displays of support from leading financial institutions suggests that cryptocurrencies are here to stay, so its crucial that misconceptions surrounding their safety are cleared up.

Samuel Leach, Owner of YieldCoin 

Image Credit: David McBee / Pexels

Samuel Leach
Samuel Leach is the owner of YieldCoin.