As cryptocurrencies like Bitcoin and Ethereum move into the mainstream, more and more people are starting to look into crypto. And one of the most common questions is a simple one — is crypto safe?
This comprehensive guide will tackle the often confusing world of cryptocurrency, with a focus on what the average person needs to know to invest in and use crypto safely.
What is Cryptocurrency?
Cryptocurrency is a type of digital or virtual currency.
The term “cryptocurrency” can refer to any one of thousands of digital currencies. Some of the most common (and most valuable) cryptocurrencies are Bitcoin (BTC), Ethereum (ETH), and Solana (SOL).
Crypto is essentially a peer-to-peer payment system. It doesn’t rely on banks to process transactions or central governments to create the currencies being used.
Cryptocurrency can be used as a currency and a medium of exchange. But for many, it’s seen primarily as an investment.
Unlike traditional currencies like the U.S. dollar, cryptocurrencies exist only in a digital form. There are no physical crypto banknotes or coins (although specific cryptocurrencies are often called “coins” or “tokens”).
Another big difference is that cryptocurrency is decentralized. This means that there is no central authority creating, distributing, or regulating cryptocurrency.
This is in stark contrast to the U.S. dollar, which is strictly regulated by the U.S. government.
Cryptocurrencies like Bitcoin are borderless and accessible to just about anyone with an internet connection.
But if there’s no central authority, how is crypto safe? What prevents people from creating fake Ethereum tokens or fraudulent cryptocurrency payments?
Cryptocurrency gets its name from the term cryptography, a technology to encrypt, secure, and protect information in computer systems.
An advanced peer-to-peer network of computers works to keep records (aka ledgers) of all cryptocurrency transactions. Thousands of individual ledgers are kept and verified against each other, which helps to prevent fraud — and lowers the risk of fake tokens.
Cryptography and the blockchain are complex topics. See our full introduction to cryptocurrency for more information on how these technologies work.
Is Crypto Safe?
Despite its decentralized nature, transactions on most cryptocurrency networks are very secure — as long as crypto users take precautions. The underlying blockchain technology is inherently secure.
Crypto can be purchased, stored, and used safely — so long as the user follows best practices (see the section “How to Invest in Crypto Safely” below).
And following those same precautions, crypto can be invested in safely.
However, when it comes to investing, most experts recommend that crypto be kept at a relatively small percentage of your invested assets.
In other words, it’s safe to invest in cryptocurrency — but you shouldn’t only invest in crypto.
Experts recommend building a diversified portfolio of stocks, bonds, ETFs, real estate, and cryptocurrency.
And, of course, no investment is guaranteed.
As we saw in the 2008 market crash, even seemingly safe investments like real estate and stock index funds are prone to market crashes. Crypto is no different.
Risks of cryptocurrency
Cryptocurrency also presents some unique risks that you should be aware of.
Volatility: Crypto markets can be volatile, meaning that prices can change rapidly. You can mitigate this risk by building a diversified portfolio and buying crypto for the long term (rather than attempting to profit from short-term cryptocurrency trading).
Lost keys: Cryptocurrency is secured by the use of public and private keys (passcodes, essentially).
If you lose your private key, you lose access to your crypto. You can mitigate this risk by storing your crypto with a trusted custodian/exchange or by utilizing a Bitcoin wallet (more on this below).
Investment hype: Cryptocurrencies can be subject to intense hype and buzz, which can cause their prices to surge (and then crash). This is particularly true for lesser-known coins and “joke” coins like Dogecoin.
This risk can be mitigated by sticking to well-established coins, such as Ethereum and Bitcoin.
Phishing: Phishing attacks may target crypto-owners, attempting to obtain passwords or private keys. You can mitigate this risk by not opening suspicious emails and direct messages and not clicking on unknown links.
Limited history: Cryptocurrency is a relatively new concept, and many popular coins are less than a decade old. This presents a bit of a risk because we can’t look at historical data to see how crypto may behave in a major event, such as a war or a 2008-style market crash.
You can mitigate this risk by keeping your crypto investments as a relatively small percentage of your net worth (most experts recommend between 1–5%).
Theft and scams: Thieves and scammers often target crypto owners. The best way to mitigate this risk is to not tell anyone that you own cryptocurrency.
Regulation: Cryptocurrency is largely unregulated by world governments, at least so far. This could change, and we could see governments crack down on cryptocurrency.
China declared cryptocurrency transactions illegal in 2021, essentially banning Chinese citizens from buying crypto. While such actions are unlikely in democratic countries like the United States, it’s difficult to predict the future of crypto regulation.
You can mitigate many of these risks by taking basic precautions. We discuss crypto best practices in greater detail in the “How to Invest in Crypto Safely” section below.
Cryptocurrency Scams
There are a variety of scams in the crypto world, and Federal Trade Commission (FTC) data suggest that scams have surged in recent years.
Fortunately, with a few preventative measures, you can generally avoid these scams. It starts by knowing what to look out for.
These are some of the most common scams in the world of cryptocurrency.
“Pump and dump” scams
This scam usually affects little-known altcoins, not common coins like ETH or BTC (there are over 13,000 cryptocurrencies in total).
Essentially, a coordinated group will start buying huge amounts of the specific coin, pushing its price up. Other cryptocurrency investors pile in, hoping for quick profits. The coordinated group then sells all of the assets, causing a massive price crash.
“Giveaway” scams
Some scammers will impersonate famous people or celebrities on social media, claiming to be running a crypto “giveaway.”
They often ask people to send crypto to a certain address (often to prove “trust”), claiming that they will double it or give them large prizes. When people send their crypto to these scammers, they get nothing in return.
Mining and staking scams
Advanced crypto users may get into mining cryptocurrency or staking their digital coins as a way to increase yields. However, there are many scams in this industry, which draw people in with guaranteed profits or promises of enormous returns.
Because of their risks, both mining and staking should be kept for advanced cryptocurrency users, not beginners.
Romance scams
Scammers have even invaded the world of online dating.
They have been known to start digital relationships with online dating users, only to ask for cryptocurrency as financial support or offer a hot crypto investment opportunity that turns out to be a scam. Be wary of any cryptocurrency discussions on online dating platforms.
Phishing scams
Crypto is secured through the use of personal keys, which are essentially password phrases. Many scams attempt to gain access to your private keys. Always keep these keys secure, and do not share them with anyone.
Blackmail attempts
Some scammers send out emails or messages claiming to have sensitive information about you and demanding that you send crypto to their address — or else they will release the sensitive information to the public.
These attempted blackmailers are usually bluffing and simply looking for a quick score. It’s best to ignore these emails and mark them as spam.
How to avoid crypto scams
Here are some steps you can take in order to avoid fraud and scams:
- Stick to popular coins like Bitcoin and Ethereum. Many scams target newer, lesser-known coins with promises of huge returns.
- Stick to reputable exchanges. It’s very important to buy crypto through a trustworthy exchange.
- If it seems too good to be true, it is. If any “opportunity” offers you enormous returns, guaranteed profits, or to “double” your crypto — it’s almost certainly a scam.
- Keep your crypto secure. See the section below for more details on how to secure your crypto.
Reading up on scams in general will help prepare you for all types of fraud and spam. The FBI maintains a list of common scams and fraud crimes, along with tips on how to avoid them.
How to Invest in Crypto Safely
If you want to invest in cryptocurrencies, there are steps you should take to do so safely and effectively.
Briefly, here’s what you should keep in mind:
- Always buy from a reputable exchange
- Keep your coins safe with a trusted custodian or in your own crypto wallet (more on this below).
- Stick to the popular coins like Bitcoin and Ethereum unless you are an advanced crypto user.
- Create strong passwords for your crypto exchange and wallet accounts.
- Consider using two-factor authentication (2FA) for even more security.
- Always keep your password and private crypto keys secure.
- Keep your finances private — do not brag about your crypto or investments.
- Diversify your investments by building a portfolio of crypto, stocks, bonds, and real estate.
The basic process of buying cryptocurrency is simple enough. You sign up for a crypto exchange account, transfer in some money from your bank account, and exchange those dollars for the cryptocurrencies of your choice.
There will be transaction fees every time you buy or sell crypto. These differ depending on the exchange.
Once you buy cryptocurrency, you must then decide the best way to store it securely. Let’s walk through how you can do that.
How to store crypto safely
There are essentially two ways to store cryptocurrency: With an exchange/custodian or with your own crypto wallet.
Crypto transactions are controlled through a combination of public keys and private keys.
Your public key is given out at times in order to receive transactions.
But your private keys must always be kept secret. Anyone who has both your public and private keys has full access to your coins and can transfer the cryptocurrency out to any other crypto address.
Because of this, it is vital to keep your private keys — and, therefore, your cryptocurrency — secure.
This can be done by storing coins at a reputable exchange (with a very strong password) or by using a hardware wallet.
Storing crypto with exchanges/custodians
For newcomers to the world of crypto, the simplest method is to leave crypto stored with a trusted exchange or custodian.
When you buy crypto through an exchange, your crypto is automatically stored with that exchange.
Technically speaking, this means that the exchange keeps your private keys.
Unless you choose to transfer crypto out of the exchange and into your own wallet, your assets (and private keys) will stay with the exchange. This is essentially the “default” setting.
At any point, you can choose to transfer the crypto out of the exchange — either to another person or to your own cryptocurrency wallet.
This essentially means that the exchange is responsible for security. If the exchange is ever hacked or compromised, your crypto could be at risk.
At the same time, reputable exchanges have top-notch security and pour millions of dollars into preventing hacks and exploits.
As long as you choose a trusted exchange, your crypto will be safe.
However, if you go this route, make sure to set a very strong password for your exchange account. If someone gains access to your account, they can transfer out all your crypto assets.
Storing crypto with your own wallet
The alternative to storing crypto on an exchange is to transfer it out to your own crypto wallet.
In most cases, you will still buy the crypto through an exchange, but you’ll then transfer it to a separate dedicated wallet.
This essentially shifts the security burden from the exchange on to you. For this reason, this is mostly recommended for experienced crypto holders and those with large amounts of capital invested in crypto.
There are a few different types of cryptocurrency wallets:
Hardware wallets: These are devices that store cryptocurrency offline. They often look like small USB thumb drives and can cost around $100 — but they are widely considered to be the most secure way to store crypto.
These are considered “cold wallets” because they are not connected to the internet.
Software wallets: These are services, apps, or websites that store cryptocurrency online. They can be web-based (browser extensions such as MetaMask), desktop applications (such as Electrum), or mobile apps (such as Blockchain.com’s app).
These are often called “hot wallets” or “online wallets” because they are connected to the internet and so may be more at risk of certain exploits or hacks.
Paper wallets: These are an old-school solution to a very new-school problem. A paper wallet is just your private keys written down on a physical piece of paper (and stored somewhere safe).
Many wallets only support a specific type of crypto. For instance, there are Bitcoin wallets that only work with Bitcoin. Others allow for secure storage of multiple coin types.
There’s a lot to know about crypto wallets. If you choose to go this route, read this full guide from Business Insider.
EarlyBird for crypto
If you want to invest in cryptocurrency for your children’s future (or for any of the little ones in your life), EarlyBird is a great option.
Conclusion
Investing in crypto can be safe, so long as you follow best practices for keeping your holdings secure.
It’s important to remember that no investment is guaranteed, however. Crypto can certainly lose value — just as we’ve seen with stocks and real estate in the past.
Cryptocurrency should generally be thought of as part of your “higher risk, higher reward” investments — a group that may also include stocks. The potential for strong returns is high, but there is generally more volatility in crypto markets than in bonds or real estate.
Cryptocurrency comes with its own set of unique risks. But as part of a diversified portfolio of assets, investing in crypto can be a great choice.
Ultimately, it’s up to you to decide if cryptocurrency is compatible with your risk profile and overall investment portfolio.
Want to learn more about personal finance and investing? Check out the rest of the EarlyBird blog! It seems like everyone is talking about cryptocurrency these days. And with prices soaring, it’s easy to see why.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.
