Is Bitcoin Safe To Invest In? Key Factors To Consider for Safer Investment

Bitcoin is a hot topic these days. As the first and most popular digital asset, Bitcoin emerged as a digital alternative to cash and gold during the 2008 financial crisis. Fast forward to today, and Bitcoin has attracted a diverse crowd of supporters, from libertarians and tech geeks to institutional investors and hedge funds. You might feel pressured to invest with so many people interested in Bitcoin. If you’re asking yourself, is Bitcoin safe to invest in? you’re not alone. Many new and seasoned investors share this concern. In this guide, we’ll provide insights on the safety of investing in Bitcoin and how to make confident, informed decisions while minimizing risks and maximizing Bitcoin annual returns.

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Is Bitcoin Safe to Invest In?

bitcoin in balls - Is Bitcoin Safe To Invest In

Bitcoin can be a wild ride. Prices fluctuate quickly and often. In 2022, the cost of Bitcoin dropped from almost $48,000 to lows around $16,000. Losses like that would send investors running for the hills for any other asset class. If you define security as an investment with a relatively stable price, Bitcoin may not be a safe bet for your investment portfolio. That said, Bitcoin’s mercurial nature may be changing. “Bitcoin is becoming more integrated with traditional financial markets and is seeing significant participation from retail and increasingly from institutional investors,” says Ryan Burke, general manager at Invest at M1. “Historically, BTC has been more volatile, but it has become a de facto mainstream alternative asset more recently correlated to large-cap tech.”

If you think of Bitcoin as digital gold, similar to a commodity rather than an investment security, you can add another dimension to the security question. “Bitcoin technology is relatively safe, but it isn’t anonymous and relies on passwords,” says Daniel Rodriguez, chief operating officer at Hill Wealth Strategies. While Bitcoin disguises your personal information, the address of your BTC wallet is publicly available. “Hackers could use web trackers and cookies to find more information about the transactions that could lead to your private information and data,” Rodriguez says. If anonymity is part of your definition of security, Bitcoin might not be entirely secure. Your BTC is only as safe as the wallet you keep it in. If you lose your wallet password or someone else gets ahold of it, you lose your Bitcoin.

The Risks of Investing in Bitcoin: What You Need to Know

Like any investment, Bitcoin is not risk-free. It has many risks, from market to regulatory risks and cybersecurity risks. “Market risk is one of the biggest risks associated with Bitcoin,” Rodriguez says.

Look at any price history chart and see what kind of a wild ride Bitcoin investors are in for. “Historically, Bitcoin also reacts inversely to interest rates,” he says. “So, when the Fed raises rates, Bitcoin typically takes a dip because investors start leaning toward more safe and stable investments.”

Regulatory uncertainty also poses a risk. “In 2021, China, the world’s second-biggest economy, effectively made it illegal for citizens to mine or hold Bitcoin,” Rodriguez says. If other countries follow suit, Bitcoin holders could be in hot water.

Cybersecurity Risks in Transactions

Cybersecurity is another chief concern for all holders of digital assets. Remember that your transactions are only as anonymous and secure as your wallet information and passwords.

The Department of Justice recently proved blockchain transactions are not immune to tracing when it followed the trail left by a couple attempting to launder $4.5 billion stolen in the 2016 Bitfinex hack. There’s also the rising threat of Bitcoin crime. The FTC reports that nearly 7,000 people reported losing an average of $1,900 in scams from October 1, 2020, through March 31, 2021.

Things to Consider Before Buying Bitcoin

Given Bitcoin’s high volatility and security risks, it’s essential to consider your reasons for buying before you trade any dollars for BTC. Bitcoin is a highly speculative investment, says Luria. “The risk/reward profile of investing in Bitcoin differs from investing in most stocks or bonds. We tend to recommend investors only consider investing capital they are willing to lose,” he says.

Are You Buying Bitcoin as an Investment to Fund Your Retirement?

It’s probably best to keep your exposure to a minimum because no one can predict where the market will go. Most financial advisors recommend keeping Bitcoin to less than 5% of your portfolio. You should brace yourself for an unreliable narrator if you think Bitcoin is a currency. You could easily log off the computer one day with $60,000 in BTC and log on with only $45,000 the next morning. There’s the uncertainty around the regulatory environment.

There is no overarching regulatory framework, such as how the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) regulate securities or how the Federal Reserve and the FDIC regulate banks. While Burke is optimistic about long-term developments for Bitcoin, uncertainty is an investor’s worst enemy. Assuming you’re comfortable with the risks and uncertainty, Bitcoin can have a place in your financial life.

Keeping Your Bitcoin Investment Safe

Your Bitcoin’s safety depends mainly on how you store it. Your choice of wallet and the level of encryption it uses to play a big part in keeping your coins safe. “Security and convenience do not always go hand-in-hand,” Burke says. He says that offline “cold” wallets that are not connected to the internet are secure from hacking but less convenient than hot wallets. Cold wallets are also subject to theft or loss. “Lose a device or drive or misplace your private key, you have a problem,” says Burke.

Hot wallets are more convenient because you can access your BTC anywhere you have an internet connection or cell service, but they are more vulnerable to hacking. “A prudent strategy is to use a combination of hot and cold storage, with most assets being held in cold storage,” Burke says. Burke adds whatever storage method you choose, so make sure you know if your Bitcoin is being loaned, staked, or pledged as collateral. Experts say it’s important to research whether investing in Bitcoin is right for your investment portfolio. If you buy BTC as part of your investment strategy, prepare for highs and lows.

Best Practices for Secure Bitcoin Storage

man with btc - Is Bitcoin Safe To Invest In

1. Protecting Your Private Keys is Key to Safely Storing Bitcoin

Your wallet’s private keys control your bitcoins on the blockchain. Anyone with private keys can quickly restore your wallet on a remote computer and transfer your bitcoins to another wallet they control. Most wallets also use a recovery phrase, a human-readable version of your private keys. Write down your recovery phrase, store it securely (not online), and never share your recovery phrase.

2. Use Multiple Wallets to Store Bitcoin

Consider using multiple wallets to store your bitcoins. For example, you can keep spending less money in a hot wallet while securing more significant balances with a hardware wallet. This also helps protect your privacy.

3. Use Different Receiving Addresses for Transactions

Popular Bitcoin wallets like Electrum allow you to generate new addresses easily using duplicate private keys. Using different addresses can help protect your privacy on the blockchain.

4. Avoid Brain Wallets

A brain wallet uses easy-to-remember words or phrases. They are also notoriously easy to crack, revealing the private keys to the wallet.

5. Consider Open-Source Wallets

Wallets with open-source firmware or software allow coders and security experts to crawl through the code, looking for errors or unwanted “features.” Trezor wallets, for example, use open-source firmware and software.

6. Don’t Buy a Used Hardware Wallet

A used wallet may seem like a bargain, but there’s no way to know if the firmware or hardware has been modified. A used wallet could be a trojan horse that sends your private keys to a third party.

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Is Bitcoin Safe To Invest In? Key Factors To Consider for Safer Investment

Jan. 20, 2025