Every investment carries a degree of risk. How does Cryptocurrency compare?
Most people store their savings in a traditional bank account. Banks are often viewed as “safe” because of their FDIC insurance, fraud prevention, and myriad other measures intended to protect your money. However, even with all of these – fraud and people losing money still happens all the time. Hacks, fraudulent transactions, scams – even bank-stored money is not immune.
With cryptocurrency, the blockchain itself provides a fundamental layer of safety that makes it virtually unhackable. The risks with cryptocurrency safety involve the exchanges and user accounts themselves, not the currencies.
Much like a bank, there are many commercial exchanges that allow for users to buy and sell crypto, store it, and more. These accounts have the same types of protection measures in place that traditional banking sites do – multi-factor authentication, text message alerts, password control, and so on.
If an exchange is hacked, it’s possible to lose your entire cryptocurrency investment. Why is this? When currencies are stored on an exchange (Coinbase, Binance, etc.), as a user, you do not physically own the coins. The blockchain doesn’t show that the coins you “own” actually belong to you. They’re owned by the exchange, and allocated to you. If the exchange closes, gets hacked and loses its assets (etc.) – you’re out of luck.
You’d imagine that this would be a huge detriment to cryptocurrency use, right? If so, you’re wrong. The vast majority of cryptocurrency users store their assets outside of the exchange through personally owned cryptocurrency wallets like MetaMask, Ledger, TrustWallet, or hardware wallets like Trezor. Once you transfer assets off of an exchange and deposit them into your own wallet, you physically own the asset. The exchange you purchased them on can be hacked, etc. and it’s of no consequence to you since they are not physically holding your assets.
Imagine – you store your money in a bank account. That bank goes offline and vanishes. You now have no way (save via insurance) to get your money back. However, if you withdraw your money and physically hold it, the bank can disappear, and it’s of no consequence to you. A cryptocurrency wallet is akin to your own personal wallet most of us carry.
Your cryptocurrency wallet, upon creation, generates a random phrase called a “Seed Phrase”. This phrase is the only way someone (including you) can ever view/manage the contents of your wallet on a machine. If you want to “add” the wallet to a machine (a personal computer, laptop, etc.) you’ll need this phrase.
If you lose that phrase, it’s next to impossible to ever regain it. Once a wallet is added to a computer, you have a password required for logging in to it. If you safely control that password and your seedphrase, it is physically impossible for you to lose your cryptocurrency assets. Setting up these wallets takes mere minutes. Transferring assets to and from exchanges is relatively simple, and is covered in greater depth in a later article. No one can take your assets, prevent you from making transactions, or limit how you use it once you physically control it.
Another advantage that personal cryptocurrency wallets provide is anonymity. If your assets are stored on an exchange, those assets are tied to you as the account owner. When you create a cryptocurrency wallet, there is no personally identifying information tied to that wallet address. This privacy is valuable to many people.
“Safety” to some people may also be referring to something entirely different. Rather than being worried about being hacked and fraud, many people new to cryptocurrency have a preconceived notion that it’s extremely volatile and could disappear overnight. Everyone has read about the “big Bitcoin crashes” in the news.
When considering any type of investment – even the stock market, there is an inherent amount of risk. Cryptocurrency is more volatile than the stock market in that the price variations are larger than what is typically seen in traditional stock investing. However, with that increased volatility comes a significantly higher rate of return. The larger market cap cryptocurrencies – Bitcoin, Ethereum, Cardano, (etc.) all significantly outperform almost anything in the stock market.
Cardano, for example, is up 1,724% as of July 2021 compared to the US dollar in the last year. Smaller market cap cryptocurrencies can result in gains even larger than this over more compressed time periods. For many, the “risk” associated with price movement in cryptocurrency is offset by the possibility for large profits like this. Even with the “crashes” of Bitcoin, nearly every investor who has held their purchased Bitcoin for more than a year has seen huge profit, and this is within the current market.
However – it’s important to understand the “maturity” of the cryptocurrency market when evaluating it as an investment choice. This is not financial advice, just information.
Cryptocurrency as a whole is young. It has been “mainstream” for around a decade, and recently eclipsed the $1Trillion combined market cap amount. Meaning – cryptocurrency is still in its nascent stages and really is small at the global scale. Apple is larger than the entire cryptocurrency market. Yet big businesses like Apple, Facebook, Google, JP Morgan, Goldman Sachs are all buying cryptocurrency.
Nearly all of the major performers in the cryptocurrency world are establishing fundamental capabilities to transfer and store data, etc. As time goes on, the benefits of cryptocurrency – lack of inflation, control of assets, decentralization – will attract more and more big business and institutional investing. This likens the current state of the cryptocurrency market to the 1990’s stock market and the digital transition that was undergone during that time.
Even with the “2008 crash” – the stock market itself is significantly higher now than it was in 2007. The cryptocurrency market will see many more bull runs and bear markets, and it’s almost guaranteed to have price volatility in the foreseeable future. Risk tolerance is different for every person and you should never invest more than you’re willing to lose – in stocks or in cryptocurrency. With all of the new projects, expansion, and growth planned in the market, the general consensus is that the cryptocurrency market and all of the “valuable projects” are going to increase in value over time. Cryptocurrency in 2030 is likely to look very different than cryptocurrency today, and the market is expected to continue growing and adapting to all of the new ways to store and transfer data that come with it.