Key Takeaways

• Bitcoin and other cryptocurrencies are susceptible to scammers and hackers, just like any other digital asset.
• Protecting your crypto investments by adequately storing them can lower the theft risk.
• You should weigh your options and consider storing their crypto with a trustworthy custodian or in a secure cold wallet.
• Based on recent market movements, it appears that Bitcoin is becoming a safe-haven asset.
• Over the past three months, three years, and six years, Bitcoin, has surpassed traditional safe havens such as gold and the S&P 500.
• Despite its recent success, it’s still crucial to approach Bitcoin investments cautiously, as there may be many obstacles ahead.

What is Bitcoin?

Bitcoin is a digital currency that emerged in 2009. Unlike traditional currencies, Bitcoin is decentralized, relying on a blockchain and peer-to-peer network to record transactions instead of a central authority. There are no physical Bitcoins; their value fluctuates depending on the market. Initially, Bitcoin was practically worthless. However, in May 2010, Laszlo Hanyecz used Bitcoin to buy two pizzas for approximately 10,000 Bitcoins (BTC), marking the first real-world transaction.

If Hanyecz had held onto those coins until Bitcoin’s highest recorded price of almost $65,000 per coin, those pizzas would have been worth roughly $650 million. Bitcoin has since influenced the development of numerous other cryptocurrencies, including Ethereum, Cardano, and Dogecoin, among thousands of others. While it may seem risky for anyone to create a cryptocurrency, the technology underpinning cryptocurrency and blockchain is surprisingly sturdy.

Why is Bitcoin Safe?

Bitcoin technology is considered generally secure thanks to its foundation on the blockchain, a highly safe and reliable technology. Additionally, Bitcoin is cryptographic, public, decentralized, and permissionless, further contributing to its safety. However, as an investment, Bitcoin can be risky due to its volatility in the market. Here are the four primary reasons why Bitcoin technology is, for the most part, secure:

Bitcoin Uses Secure Cryptography

The foundation of Bitcoin is the blockchain, a different system that sets it apart from other financial solutions. The Blockchain is an advanced technology that operates on certain core principles and cryptography. It employs an extensive network of volunteers to sign hashes validating transactions on the Bitcoin network, ensuring high security. Transactions processed via the blockchain are typically irreversible, and the data security measures protecting Bitcoin are robust.

Bitcoin is Public

At first glance, Bitcoin’s transparency is not a safeguard. However, Bitcoin’s public ledger ensures that all transactions are visible to everyone, including those who remain anonymous. As a result, it’s challenging to commit fraud or cheat the system. Since all transaction data is public, there is no need for malicious actors to attempt to hack into any databases.

When compared to traditional companies‘ frequent data breaches, Bitcoin is a more secure option. When you buy or sell Bitcoin, you don’t need to provide personal information such as passwords, credit card numbers, or your physical address to the blockchain, making it impossible to leak such information.

Bitcoin is Decentralized

Bitcoin’s network is decentralized and distributed, with over ten thousand nodes scattered across the globe that track every transaction on the system. The sheer number of nodes ensures that if one of them goes down, others can quickly take over its duties.

Attempting to hack into one of these servers is pointless, as there is nothing of value to steal that the other nodes and servers cannot prevent. The only scenario where hacking into the system would be feasible is if someone had control over 51% of the nodes, which is highly unlikely.

Bitcoin Doesn’t Require Permissions

One of the benefits of Bitcoin’s public and decentralized nature is that it’s accessible to anyone without requiring permission from any central authority. Bitcoin’s lack of permissions ensures it remains open and fair for everyone. No one can exclude specific individuals or groups from participating.

Is Bitcoin a Safe Investment?

Determining if Bitcoin is a safe investment is a complex matter that depends on how you define safety. One of the main concerns is the volatility of Bitcoin prices, which can swing wildly in a short amount of time. This can make Bitcoin a risky investment for those who prioritize price stability.

However, Bitcoin is gaining more mainstream acceptance, with growing participation from institutional investors and integration with traditional financial markets. Some people view Bitcoin as a digital alternative to gold, which can add another layer of safety if you consider it a commodity.

On the other hand, Bitcoin’s technology is secure. Still, it’s not entirely anonymous and relies on passwords to protect your data. The address of your crypto wallet is publicly available, and anyone could use web trackers and cookies to extract more information about your transactions. If anonymity is a crucial factor, Bitcoin may be safe.

Moreover, your cryptocurrency is only as secure as your crypto wallet. If you lose your password or someone else gets access to it, your Bitcoin is gone for good. Finally, it’s important to note that Bitcoin purchases aren’t SIPC or FDIC protected, meaning there’s no financial safety net in case the firm holding your investments goes under.

Does Bitcoin Use Encryption?

Bitcoin is often called a “cryptocurrency,” but it doesn’t use encryption. The name comes from the digital signature algorithm, which relies on mathematical techniques similar to those used in encryption based on elliptic curves. Specifically, Bitcoin uses the Elliptic Curve Digital Signature Algorithm (ECDSA) with the secp256k1 elliptic curve, not encryption.

Does Bitcoin Qualify as a Reliable Long-Term Store of Value Yet?

For years, Bitcoin has been a popular subject in finance, with opinions on the cryptocurrency varying widely from being a revolutionary new asset class to a dangerous speculative bubble. Despite the differing opinions, most experts agree that Bitcoin’s volatility has historically made it a less-than-ideal safe-haven asset.

However, recent market movements suggest that this may be changing. Some market experts believe that Bitcoin could become a safe-haven asset in the future, despite its volatility. This is due to growing interest from institutional investors and large corporations and the cryptocurrency’s increasing acceptance as a legitimate asset class, similar to gold.

What are the Risks of Bitcoin?

When buying and owning Bitcoin, there are three main risks to consider. Firstly, the value of Bitcoin can decrease after you purchase it, just like with any other type of investment. Bitcoin is known for its volatility, which means the price can fluctuate rapidly.

While this volatility can provide profit opportunities, it can also lead to significant losses. Secondly, suppose someone gains access to your private key. In that case, they can transfer your Bitcoins to their wallet without your consent, leaving you with no way to recover them. Finally, if you lose your private key, you won’t be able to access your Bitcoins. 

It’s important to note that the first risk is common in any investment, and Bitcoin is no exception. While there is potential for significant gains, substantial losses are also possible. The other chances are specific to Bitcoin and related to the security of your private key. Keeping your private key safe and secure is crucial, whether you store it on a storage device offline or use an online wallet. By taking appropriate security measures, you can mitigate these risks and potentially reap the rewards of investing in Bitcoin.

Is Bitcoin Safe if You Lose Your Keys or Hard Drive?

When investing in Bitcoin, knowing the risk of losing access to your investment is essential. Bitcoin is accessed through a public and private key, with the private key being the most important. If you lose your private key, you may lose your Bitcoin forever. If you use an exchange to store your Bitcoin, the exchange holds your private key. While this reduces the risk of losing your key, it also means that it could be compromised if the exchange is hacked. If you use an independent crypto wallet, you’re responsible for your key.

Software wallets require you to keep your key written down somewhere safe, while hardware wallets provide the key themselves. With wallets provided by exchanges, you can only lose your password, which you can reset. But you lose the private key to an independent software wallet. In that case, you may never be able to recover your Bitcoin. The wallet’s developers won’t be able to verify your ownership, so keeping your key safe is essential.

How to Keep Your Bitcoin Safe

To protect yourself when dealing with cryptocurrencies, it’s essential to follow some standard cybersecurity practices:

• If you take care of your wallet, never give anyone the private key to your cold or hot wallet. Just like you wouldn’t share your email password, keep your keys secure. Writing them down is also a good idea, as losing them could mean losing your crypto forever.
• Avoid bragging online about how much crypto you have. The FBI suggests keeping your financial information private to prevent being targeted by SIM swap scams.
• Be cautious when clicking on email links. Phishing scams are common in the crypto world. If you get an email that appears to be from your exchange, first verify that the domain address is correct. For example, an email from Coinbase should come from an @coinbase.com address. Contact your exchange’s customer support team to confirm the email’s legitimacy if you need more clarification.
• Never click on a link in a social media direct message. Exchanges only contact you via social media direct messages if you’ve got their support team. Sending fake links through social media messages is now one of the most popular phishing tactics.
• Use 2-factor authentication for all accounts. This requires you to enter an additional code beyond basic login information, such as a username and password, to access your account. This code is typically sent to your mobile phone or email. It provides an extra layer of protection if your login information is compromised.

Wallets to Keep Your Bitcoin Safe

Cryptocurrency wallets come in different forms:
Hardware wallets: These devices are similar to USB thumb drives and store crypto offline, making them the most secure option. Though they cost around $100, they are often called “cold wallets” because they are not connected to the internet.

Software wallets are online services, apps, or websites that store crypto. They may be web-based, like MetaMask, desktop applications, like Electrum, or mobile apps, like Blockchain.com. They are often called “hot wallets” or “online wallets” because they are connected to the internet and may be more vulnerable to specific hacks or exploits.

Paper wallets: This is an old-school way of securing your crypto. Your private keys are written down on paper and stored somewhere safe. Some wallets only support one type of cryptocurrency, like Bitcoin, while others allow secure storage for multiple types.

Watch out for Bitcoin Scams

As the value of Bitcoin rises, so does the number of scams targeting Bitcoin investors. The Federal Trade Commission disclosed that in a recent six-month period, almost 7,000 people lost $80 million to fraudulent Bitcoin schemes offering quick returns. Scammers create websites that use fake testimonials and cryptocurrency terms to seem legitimate. Still, promises of high, guaranteed returns are nothing but lies. Some of these sites even present phony investment growth.

Still, when investors try to withdraw profits, they are asked to send more cryptocurrency and end up with nothing. Be cautious of phishing scams, where you get emails that appear to be from a cryptocurrency exchange but are a ploy to steal your passwords. These emails may look genuine, complete with proper branding and logos.

Is Bitcoin Safe From the Government?

Traders who deal in Bitcoin transactions are also worried about government crackdowns. Recently, China and Turkey have taken steps to restrict or ban the use of cryptocurrencies. Financial services and payment companies in China were banned from carrying out crypto transactions.

Meanwhile, Turkey’s Central Bank prohibited using cryptocurrencies for purchases. It remains to be seen if other countries will follow suit with similar restrictions on trading cryptocurrencies. However, it is more likely that governments will impose additional regulations to protect consumers from scams and other bad-faith actors that may result in loss of money.

Other Things to Know Before Buying Bitcoin

If you’re considering buying Bitcoin, there are a few things you should keep in mind:

• Bitcoin is just one of many cryptocurrencies. While Bitcoin is the most well-known, other cryptocurrencies are available for trading. Some may be more profitable than others, but none are inherently more or less safe than Bitcoin.
• Bitcoin trading accounts may not be insured. While brokerage accounts are often insured by the Securities Investor Protection Corporation (SIPC) for up to $500,000, this insurance doesn’t cover commodities or currencies like Bitcoin. That means that if the company holding your Bitcoin goes under, you may be unable to recover your investment.
• Diversifying your investments can help mitigate risk. Putting all your savings into a single asset, especially as volatile as Bitcoin can be risky. Investing small amounts across different investments can spread risk and limit potential losses.

Bottom Line: Is Bitcoin Safe?

When it comes to determining whether Bitcoin is safe or not, it all depends on how much risk you are willing to take. Although risks are involved in various stages of the trading process, the technology behind Bitcoin is solid. However, just because it’s challenging to hack doesn’t automatically mean it’s completely safe. You should do your homework on Bitcoin and weigh the pros and cons of investing in an asset with a reputation for fluctuating wildly in value.