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World | Oct 1, 2022

Is cryptocurrency a safe investment?

/ Our Today

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Representations of cryptocurrencies in this illustration taken, January 24, 2022. (Photo: REUTERS/Dado Ruvic/Illustration)

While you might not own any, or even fully understand how it works, there is no doubt that you have heard of cryptocurrency.

Since the launch of Bitcoin (BTC), the first cryptocurrency, in 2008, they have grown in size, scale and popularity, as current ‘crypto statistics’ suggest:

  • There are currently 300 million people using crypto worldwide,
  • Bitcoin – the best-known cryptocurrency and the base currency for other digital currencies – increased in value by 66 per cent between February and October 2021
  • There are more than 12,000 different types of cryptocurrency; common cryptocurrency names include Bitcoin (BTC), Ethereum, Litecoin, Dogecoin, USD Coin, Tether and XRP
  • The current market cap is $2.19 trillion, making it the world’s eighth largest economy
  • By 2023, it is predicted that the value of the blockchain market will reach $23.3 billion. The cryptocurrency – also known as virtual currency – market is transforming how we use money, how we bank and how we invest – on a global scale.

But do they make for safe investments, and how can we protect ourselves from the pitfalls of investing in these assets? What is cryptocurrency? A decentralised digital form of money, designed to be used via the Internet, cryptocurrencies present an alternative to traditional, government-issued currencies.

As Coinbase – one of the biggest cryptocurrency exchanges in the world – states, these currencies are managed by peer-to-peer networks of computers running free, open-source software.

In the absence of the security and protection offered by central banks and financial institutions, crypto transactions are vetted by blockchain technology – an ongoing record of every transaction ever made using that currency that is continuously re-verified. Blockchains are distributed between the participants of a currency’s entire network.

As with other forms of money, cryptocurrencies can be used to buy goods and services or held as investments. Its benefits include accurate tracking; cost reduction; equality of opportunity; increased transparency; and a permanent ledger of transactions.

Are cryptocurrencies safe investments?

By nature, any investment involves a degree of risk. Crypto assets can involve a greater degree of risk; the market is characterised by intense volatility, and has been crashing since reaching an all-time high in November 2021.

On January 11 2021, market statistics revealed that the crypto market experienced a loss of more than $100 billion in the space of 24 hours. A market crash saw Bitcoin lose approximately 10 per cent of its value, while Ethereum lost 15 per cent.

Representations of cryptocurrency Bitcoin plunge into water in this illustration taken, May 23, 2022. (Photo: REUTERS/Dado Ruvic/Illustration)

So far in 2022, there have been significant fluctuations. However, Bitcoin experienced exponential popularity before that and, if predictions and current statistical modelling are anything to go by, it will only become more popular. The market cap is no negative: coins will be more highly sought after, and therefore more valuable, over time.

It is often said that the world of crypto is a ‘Wild West’ – from unregulated trading to scams to the involvement of crime syndicates. Even for confident traders who are comfortable with more high-risk trading and dealing in decentralised forms of finance, as with any investment, users should not put more money in than they can afford to lose.

Ultimately, the industry shows no signs of slowing. As a result, it may quite literally pay to get involved early and reap the long-term benefits.

Cryptocurrency scams

The crypto hype – and the vast sums held in crypto exchanges – have, naturally, attracted numerous hackers and scammers. Cryptojacking, cybercrime and fraudulent initial token offerings are just a handful of examples of the dangers associated with crypto trading.

TechTarget reported that, in February 2022, exchange platform Wormhole lost $320 million following a cyberattack, with the Federal Trade Commission reporting that $1 billion has been lost to scammers since 2021.

Common crypto scams to keep an eye out for include:

  • Bitcoin investment schemes
  • rug pull scams
  • romance scams
  • phishing scams
  • man-in-the-middle attacks
  • social media cryptocurrency giveaway scams
  • Ponzi schemes
  • fake cryptocurrency exchanges
  • employment offers and fraudulent employees.
Representations of the Ripple, Bitcoin, Etherum and Litecoin virtual currencies are seen on a PC motherboard in this illustration picture, February 14, 2018. (Photo: REUTERS/Dado Ruvic/Illustration/File)

Best practices to protect digital wallets include using trusted exchanges platforms, creating strong passwords that are never shared with anyone, trading via VPNs and other secure connections, choosing cold wallet storage, and staying alert to potential scams and fraudulent activity.

Cryptocurrency investments: What to consider…

So, what do you need to know before buying Bitcoin or other crypto investments?

Before you invest, it is critical to do your research and due diligence so you know what you are investing in and what the associated risks are. The more you know about cryptocurrencies like Bitcoin – and the wider crypto market more generally, including the most popular currencies in circulation – the simpler it will be to trade and invest with minimum risk.

Research what the market is doing and for insights into investment strategy it is useful to follow advice from crypto experts. Crypto beginners should look for the right trading platform to help purchase and sell coins. Some of the safest crypto exchanges are reported to be Coinbase, eToro, Binance, Gemini and Kraken, although there are plenty to choose from, each offering an easy-to-use dashboard to get started.

Representations of virtual cryptocurrencies are placed on U.S. Dollar banknotes in this illustration taken November 28, 2021. (Photo: REUTERS/Dado Ruvic/Illustration/File)

Platforms with licences, insurance policies, customer support, cold storage of assets – meaning digital assets are inaccessible in the event of hacking, two-factor authentication, bug bounties, and those which are publicly traded companies can present safer options for your digital wallet than others.

Using crypto trading bots and similar tools can also help to minimise risk. Trading bots automate trading strategies and are used to amplify trading profits, with minimal human intervention. They can be applied to the trading of both single and multiple currencies across single or multiple platforms. It can be a difficult experience for those new to crypto trading, as they may be trading against those with infinitely more expertise.

This article is published courtesy of the University of the Commonwealth Caribbean.

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