Are Cryptocurrencies Safe?

Cryptocurrencies are one of the great phenomena of the 21st century and continue to attract investors. They are unlimited reasons why investors may invest in crypto. In their minds, crypto-asset may be a way to hedge against inflation or they may simply want to keep crypto as a backup investment just in case. Other possible reasons could be that they support the idea of decentralized finance, or they might believe in the future of “digital gold.” Whatever the reasons may be, there are also those investors who are not too keen on joining the sector. For them, the nature of the cryptocurrencies is too risky, not only in terms of volatility but also due to security concerns such as hacks. In the digital age, safety remains number one on the priority list. Questions that leave investors wandering are – how safe are cryptocurrencies? Is it safe to invest now?

Crypto Hacks – A Major Problem for Crypto Exchanges

Ever since the biggest hacks of Mt. Gox exchange happened in 2014, crypto investors had difficulties trusting and finding a safe trading environment to store their crypto. Almost every year, there are major attacks that affect thousands of crypto investors. Just last year, KuCoin, one of the biggest cryptocurrency exchanges, was hacked and lost almost 200 million dollars (MCMILLAN, 2014).

Sadly, hacks are unforeseeable and still commonplace in the industry. However, what has changed, is the response by exchanges. They are much stronger when it comes to recovering lost or stolen funds. For example, in the case of KuCoin, 84 % of all the stolen funds were tracked down and returned into the accounts of investors. Obviously, this does not mean that the sector per se is a safer place. It just means that exchanges are paying more attention to safety (Drake, 2020).

Different Kinds of Cold Wallets

All hope is not lost as there are several solutions to the problem. Investors who do not feel safe enough to store their crypto within exchanges can move their cryptocurrencies into wallets which are much safer environments for storing cryptocurrencies. There are numerous types of wallets on the market, such as hot wallets, paper wallets, mobile wallets, and lastly, cold wallets. Cold wallets are perceived as particularly safe. These types of wallets are not connected to the internet, which means, that once you transfer your cryptocurrencies to your wallet, they cannot be hacked from the outside. They are much safer, but a bit inconvenient, since you must connect them to an exchange when you want to make a trade. Cold wallets, also known as hardware wallets, are usually thought of as devices that should serve for “hodling” for many years.

Source: exodus.com

 

Ledger and Trezor are two companies that provide their cold wallets products and services to cryptocurrency investors for many years. Cold wallets from these two companies are regarded as highly safe and offer various models with different services and options depending on the needs of investors. There are few other hardware wallets such as KeepKey or Prokey Optimum, which are other options to choose from (M, 2021).

How Do You Determine the Safety of Cryptocurrencies?

Safety while buying, selling, or storing cryptocurrencies is obviously important, but is this investment class safe itself? Is the nature of the digital assets, coins, and tokens safer than the traditional financial system?

The mere fact that most of the cryptocurrencies implemented blockchain as its core technology means that it is a decent form of protection. This distributed ledger technology is relatively new and many experts from the IT sector believe that it can bring the same paradigm shift as was seen with the invention of the Internet.

The greatest example of the safety of blockchain is to look at the first usage of this technology, which is Bitcoin. During the time of writing this article, the market capitalization of Bitcoin is approximately 1 trillion dollars. This means, that if someone was able to crack blockchain, hack it, or perform some form of attack that would destabilize the network of Bitcoin, and his or her “bug bounty” would be a staggering 1 trillion dollars’ worth of Bitcoin. As of now, this looks like an impossible task to do.

This does not mean that all cryptocurrencies are safe. Before even creating the cryptocurrency, the team behind the project is faced with the so-called “blockchain trilemma.” For simplicity, the blockchain trilemma is the opportunity cost of choosing two out of three crucial concepts in the blockchain world. These are scalability, security, and decentralization. Nonetheless, it is visible that security is crucial for cryptocurrencies.

Source: cryptoticker.com

So, are cryptocurrencies really safe? The answer to this question is harder than it looks. When we talk “safe cryptocurrency” Are we talking about the ability of exchanges to resist the hacks? Are we talking about the ability of investors to safely store their cryptocurrencies? Are we talking about the safety of cryptocurrencies in their very nature? The answers to these questions may vary.

Reference

MCMILLAN, R. (2014, 3 3). The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster. Retrieved from Wired: https://www.wired.com/2014/03/bitcoin-exchange/

Drake, E. (2020, 11 13). KuCoin recovers 84% of funds lost in $280 million hack. Retrieved from Coingeek: https://coingeek.com/kucoin-recovers-84-of-funds-lost-in-280-million-hack/

M, L. (2021, 3 3). Trezor VS Ledger: Things to Know Before Buying. Retrieved from Bitdegree: https://www.bitdegree.org/crypto/tutorials/trezor-vs-ledger