Introduction
Perhaps you’ve researched cryptocurrencies like Bitcoin and you want to buy some, but are still hesitant because you’re not sure how safe it is to buy cryptocurrency (crypto). You don’t want to put your hard-earned money at risk.
Well, let’s talk about it and by the end of this article, you should be able to make up your mind on whether crypto is a safe investment.
Is Cryptocurrency A Safe Investment?
Everybody is going to have a different idea about what “safe” means when referring to a financial investment. To get some perspective, let’s talk about a few traditional investments for comparison’s sake.
Real Estate – is it safe?
Most would agree that buying real estate is a safe investment over the long term. But in the short term, you can take a big loss if a recession hits and the markets drop.
What if you need to cash out right away for a family emergency? With real estate, this is not so easy. It can take several months to liquidate a property before you get your cash.
So the safety of a real estate investment really depends on the time frames involved.
Gold – is it safe?
Gold is considered as a hedge against inflation. One thing is certain – governments will always tend to extend the money supply more than necessary to help them pay for all that stuff they promise to us. So they print more dollars and your purchasing power is reduced (inflation!), at least until wages adjust which could be years later.
As the money supply is inflated, the cost of assets rises, so the price of gold theoretically should rise in proportion to the increase of money supply. But does this really happen?
Looking at the above chart, it is obvious that gold does not rise proportionally with the growth in money, not even close.
If you were to buy gold in 2008, the value of your gold would double over the next three years. However, if you were to buy gold in 2011, the value of your investment would plummet over the next few years and it would take 9 (!) more years until the price recovered to your purchase price.
So it turns out that gold can be a very volatile investment and quite dangerous to invest in it if you get the timing wrong.
Holding cash or Interest-generating Investments – is it safe?
If you were to hold cash in a bank account, this would be considered very safe by most people. But have you considered the effects of inflation?
Federal reserves try to hold inflation to a value between 1 and 2% yearly. In bad years, the inflation rate can go significantly higher. As of the time of writing this article (March, 2022), we are just getting past the Covid pandemic and due to massive money printing over the last 2 years, we are seeing an official inflation rate of 7.9%. In reality, you know that the actual inflation rate is higher than the official number.
So if you are holding your money in cash right now, you are taking a loss. Let’s say you earn a good interest rate of around 0.5% and the inflation rate is 8%, then you are taking a loss of (0.5 – 8) = -7.5% of your money each year.
So it looks like holding cash is not as safe as we thought.
We could go on and analyze other types of investments, but the conclusion is clear – all investments involve risk and sometimes the risk is much higher than we realize.
A tough lesson to learn is that if you choose to not take any risk (stash your cash in a saving account or under your mattress) your net worth erodes over time due to government policy of printing more money over time (inflation). Rip off!
Taking all of this into account, you may determine that cryptocurrency is actually fairly safe to buy compared to other investments.
What Risks are Involved With Buying Cryptocurrency?
Beat Price Volatility With Diamond Hands
The most significant risk (and I’m sure it’s the one you’re thinking of) is price volatility. There’s no doubt that cryptocurrencies like Bitcoin and Ethereum, which are considered the two safest crypto’s to invest in, are still highly volatile price-wise. To ensure you know what you’re getting into, let’s look at a historical example.
In Dec. 2017, Bitcoin reached an all-time high of approx. $20,000 then promptly started to head down. It bottomed out at approx. $3200 (yikes!) and didn’t recover to the original high until Dec. 2020 – three years later!
Had you panic-sold while it was crashing, you would have lost big. But if you had held on for dear life, eventually you would see Bitcoin reach another all-time high of approx. $60,000 in March 2020 – 3 times higher than the previous high. Wow!
The price crashes and rises at enormous rates, enough to give anybody hot sweats and a pounding heart. For this reason, you need Diamond Hands, which means you stay invested no matter what, DO NOT SELL.
The moment you sell due to extreme fear, you lose out big time and the loss becomes real. If you ride out the pain, there’s a good chance you’ll come out unscathed and go on to see your investment explode with higher value.
The biggest lesson you’ll ever get for crypto: DO NOT PANIC SELL. You need DIAMOND HANDS.
If you can’t take the sight of the chart as it rockets down, then simply don’t look at it. For at least a year. Perhaps two years. Perhaps three.
Consider crypto to be a long-term investment – don’t throw in some money expecting to strike it rich overnight (although sometimes that does happen!). Ride it out for the long term.
Don’t Get Scammed
There’s a few ways you can get scammed when first starting out with crypto:
Don’t Leave Your Crypto on an Exchange
Often, the easiest way to buy crypto is on an online exchange. But please don’t leave your crypto in your exchange account.
Sometimes – rarely – crypto exchanges get hacked. If so, there’s a chance you’ll lose some or all of your crypto, depending on the insurance terms of the exchange. And it could takes months or years to get it returned to you.
The easiest way to avoid this is to take your crypto off the exchange and hold it in a private crypto wallet. Buy a hardware wallet from Ledger or Trezor, these are the most commonly known devices.
As a Beginner, Don’t Buy Risky Crypto Assets.
There are a variety of ways to invest in crypto including crypto stocks on the stock market, NFTs, alt-coins, etc. If you are a beginner, it is best to avoid these until you understand them, as even experienced crypto traders get scammed by these.
As a beginner, just stick to the mainstream ones: Bitcoin is the granddaddy of the crypto world and Ethereum is the next-most safe after Bitcoin.
Don’t Lose Your Credentials
When you buy a hardware wallet, it is very secure but you have to keep your password/credentials in a safe place, preferably a copy with you and another copy in another physical location. If you lose your credentials, there is simply no way to ever recover your crypto assets. Ever.
So whatever hardware wallet you choose, ensure you do some research on how to keep your credentials safe and recoverable, even if your house burns down and you forget your passwords. (Please note that if your hardware wallet gets destroyed, no big deal; you can still recover your crypto assets as long as you have your credentials).
Conclusion
Have you decided if cryptocurrency is a safe investment yet? The answer really depends on your risk tolerance level and the length of time you want to invest your hard-earned money. The longer you can hold onto your crypto assets without selling, the less risk you take on. Given a long enough timeframe all assets go up.
If you have any questions, please post them in the comments below. We’ll try our best to answer all of them.
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