Are cryptocurrencies safe to invest in?
4 min read . Updated: 02 Nov 2021, 03:44 PM IST
PremiumLet’s go over the various ways in which people think cryptocurrencies are unsafe, and see if those fears are legitimate and real.
The hit Netflix show Squid Game has spawned more than a loyal viewership; for a short period of time, it also led to the creation of a new cryptocurrency called Squid! The problem, however, is that the cryptocurrency had nothing to do with Netflix or the show, and actually led to thousands of people losing quite a lot of money... Cashing in on the popularity of the show, the anonymous creators of Squid encouraged people to invest and then withdrew all the project’s funds and vanished, leaving investors with nothing.
This is just one of several stories where cryptocurrencies have been used to dupe people, which has led potential investors to ask the basic question: are cryptocurrencies safe to invest in?
There have been a few sensational stories of investors losing their life savings due to a sudden fall in the price of the cryptocurrency they invested in. The distrust of cryptocurrencies as a safe investment option has been persistent, and has resisted every attempt to dispel the fears.
Rather than trying to highlight the features that make cryptocurrencies safe, this article, therefore, tries a different approach. Let’s go over the various ways in which people think cryptocurrencies are unsafe, and see if those fears are legitimate and real.
Cryptocurrency prices are volatile
Yes, there is no doubt that cryptocurrency prices can be volatile. Without any central authority regulating them, or any real asset providing the basis of their value, the price of cryptocurrencies moves in accordance with people’s perception of their value. A single tweet by a celebrity or CEO can and has made the price of Bitcoin move up or down by thousands of dollars. However, it is precisely this that also makes it an attractive investment option.
Therefore, a way to mitigate one’s risk while investing in cryptocurrencies would be to treat it like any other high risk-high reward investment instrument. Investors would be best advised to avoid putting a very large part of their savings in cryptocurrencies, in much the same way as they wouldn’t invest solely in any other single instrument.
Further, while investing in cryptocurrencies, prudent investment practice would recommend a diversified portfolio so that a sudden drop in any one cryptocurrency does not wipe out the entire invested amount.
So, while there is some risk associated with investing in cryptocurrencies, very basic prudent investment practices will go a long way in mitigating that risk.
Cryptocurrencies can be hacked
There have been several reports over the years of the blockchain on which a cryptocurrency is based getting hacked and the hacker making off with thousands of dollars. Understanding this risk involves understanding how the hacking usually happens. One of the most common ways in which a blockchain gets hacked is if a single user gets access to more than 50% of the nodes on the blockchain. In this way, the user can authenticate any transaction—even fake ones—by forcing a majority consensus through their more than 50% nodes.
However, this is a viable option for hackers only when dealing with relatively smaller blockchains where there are fewer nodes. According to most reports, the Bitcoin blockchain has in excess of 100,000 nodes that have a full copy of the blockchain and that can be used to authenticate a transaction. This means a hacker would have to gain control over more than 50,000 nodes to gain control of the Bitcoin blockchain. It’s like saying somebody would have to break into the mint to print more money. It’s technically possible, but very improbable.
So, if investors want the relatively safer route while investing in cryptocurrencies, they would do well to stick to the larger ones.
Losing access to one’s investment
Another fear people have while investing in cryptocurrencies is that they would be at some point locked out of their accounts for whatever reason. There have been reports of this happening as well, which have fuelled the fears, even if the actual incidents are few and far between. Losing access to your account would involve losing your private key. While some people store their private keys in secure apps online, others copy them onto a pen drive and then keep that pen drive physically safe.
A fear of losing your private key is like being scared of losing your net banking or email password. It is possible, but basic security steps can make sure it doesn’t. Keep a copy of the key or password in a separate secure location, and you will ensure that you aren’t locked out of your account.
The creators disappear
Just like with the Squid cryptocurrency, investors are scared that the creator of a particular cryptocurrency will just take all the money and disappear. This is a possibility, as has been shown time and again. Further, since cryptocurrencies are unregulated, there is nobody for you to turn to for help. This is where research comes in handy. If investors do their research and read up about the antecedents of the creators of a cryptocurrency—how old the company is, how big, which jurisdictions it operates in, market value, etc—then that will go a long way in helping them select a reliable cryptocurrency.
Conclusion
Overall, investing in cryptocurrencies is like investing in any other instrument. Just like ads for mutual fund investments come with a long warning at the end, consider this article that long warning for cryptocurrency investments. Sensible and basic security practices will go a long way in securing your cryptocurrency investments.
