Is cryptocurrency safe? Have digital currency investments become a fool’s errand that you should avoid? These and many other questions are battering many new investors to the cryptocurrency market.
Investors that joined the market at its 2021 peak are most unnerved and counting their losses as the sector dives off the cliff. This downturn has drained the market of over $1 trillion of liquidity in a year.
Due to the bumpy ride, bitcoin, the world’s most popular cryptocurrency, is trading at lows of $20,000 from its November 2021 market capitalization of $68,000.
Critics have referred to cryptocurrencies as a ‘mirage’ because they “do not meet the test of a currency found with a centralized exchange,” they say. So, have their warnings finally come true? Is cryptocurrency safe as an investment vehicle or nothing more than a Ponzi scheme?
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Why the crypto market is crashing
The cryptocurrency market has largely stalled, and prices of major assets could plunge further before recovery. So, any person that bought these assets at their 2021 highs feels like this investment poker game has dealt them a pair of twos.
Besides falling market valuations, horror stories of frozen investor accounts in crypto banks have also spread massive FUD (“Fear, Uncertainty, and Doubt”). To illustrate this point, Celsius, one of the crypto sector’s biggest lenders, halted customer withdrawals, transfers, and swaps in June.
Celsius attributed their actions to “extreme market conditions .”A month later, Celsius filed a chapter 11 bankruptcy protection, leaving its investors in a frenzied asset recovery effort.
Adding fuel to the FUD is the recent spate of high-level resignations in mega crypto firms.
Alex Mashinsky, the CEO of the imploded lender Celsius, stepped down, leaving his Finance Chief in command. And in yet another high-profile resignation, FTX US president Brett Harrison stepped down, tweeting that he would now take “an advisory role at the company.”
Other resignations that have had a profound impact on the sector include Michael Saylor’s as CEO of MicroStrategy and Jesse Powell’s resignation as the Kraken exchange CEO. All these events suggest an ongoing crypto con.
However, unbeknown to many investors, the crypto market may be experiencing a bear market, but so are other traditional financial markets.
In its infancy, investors regarded cryptocurrencies such as bitcoin as safe-haven assets, just like gold. However, as the market matures, it now directly correlates with the legacy investment market’s movements.
It is as vulnerable to market shocks such as energy pricing, inflation, rising interest rates, and the Covid-19 pandemic. Some major macroeconomic factors that are impacting all markets include:
- Double-digit levels of inflation in most countries
- Geopolitical crises
- Rising interest rates
- A high risk-off sentiment due to global fears of a recession
As inflation continues to bite in most economies around the globe, the bear trend in both sectors will be long and drawn out. Central banks will hold on to their tighter stances leaving the stock and crypto markets struggling in the coming days.
The recession-like environment pushes every sane investor away from sectors that show an increased cost of capital and contraction in consumption, such as crypto and stock markets.
Why cryptocurrency is a good investment in 2022
Cryptocurrencies have a higher risk-to-reward potential than blue-chip tech stocks. However, they’re riskier and more speculative. Still, benefits such as increased volatility during recovery, resistance to control, and higher equity offerings make them excellent investment assets.
However, the crypto market’s legendary volatility is the ace up its sleeve. To illustrate this point, bitcoin only needs to make a 25% recovery in its current $20,000 price to rise to the $32,000 price range.
BTC would sell 53% lower than its November 2021 highs at this price point. However, these gains would give the investor an excellent return on investment.
In contrast, the Nasdaq Index would need to reverse its 2022 year-to-date losses of 24.4% and make 40% more gains to score 19,563 points. This arduous rise would give its new investors a 64.4% return on investment.
However, unlike cryptocurrencies, high stock profits morph into follow-on offers. Follow-on offers are incentives for more stock issuance that dilute investor gains. Higher earnings in stocks lead to more acquisitions of niche competitors. As a result, purchases will secure a company’s leading position but may cut investor returns from richly valued stocks.
Crypto coins, however, are different. For instance, BTC, dogecoin, and ETH 2.0 have fixed supply mechanisms. Consequently, price fluctuations do not affect their supply. So, is cryptocurrency a good investment? Yes, it’s a solid investment with a risk-reward ratio that provides a higher return on investment.
More reasons why cryptocurrency is a good investment
- Cryptocurrencies are an excellent investment portfolio diversification asset
As per the 2022 CFA Institute Investor Trust Study, the traditional retirement savings pathway is no longer effective. A bond and stock portfolio has lost its weight due to slower wage growth and rising inflation.
Declining real returns and a massive aging population have become critical threats to future pension fund sustainability. To this end, at least 94% of state pension sponsors now use digital assets to diversify their portfolios and address any return shortfalls. Then, 62% of benefit plans in the corporate circle invest in digital assets too.
- They provide a level investment field to marginalized populations
Cryptocurrencies can level the playing field and build a fairer financial system that gives everyone an equal chance at wealth generation. They offer lower access barriers, and data shows marginalized populations invest at par or more in crypto than prominent legacy finance investor groups.
- Incoming regulations could lead to better investor protections
Cryptocurrency regulation could undergo regulation by the Securities and Exchange Commission or CFTC, lowering fraud and instituting better consumer protections.
- More institutional investor interest in crypto superstructures
Institutional interest in crypto is at an all-time high, despite bear market conditions. Legacy financial institutions such as Charles Schwab are launching crypto-linked exchange-traded funds. Black Rock is linking its customer base to the digital asset platform Coinbase, building superstructures that will bring massive returns in the recovery period.
- Growing mass adoption
Checkout.com’s Demystifying Crypto report shows that 40% of 18–35-year-olds will make crypto payments in 2022. Then, 23% of eCommerce will offer crypto payment as an option by 2024. In addition, at least 36% of CFOs in their survey would like to use stablecoins in their payments. This data indicates that crypto is still en route to mass adoption and is, therefore, a good investment.
Then, as per Pymnts.com, 56% of consumers are interested in crypto investments come 2023, despite all crypto gloom and doom. While a higher percentage of crypto investors are high-income consumers, people under economic duress also allocate a disproportionate share of their investable assets and savings to crypto.
- It is a ‘warm’ crypto winter.
Unlike other crypto bear runs, the ongoing downturn is driven by debt contagion and macroeconomic factors. The 2021 bull market was caused by a high-yield, high-risk environment, leading to a shakeout that pundits call a ‘warm winter.’
The ongoing depressed prices will push short-term gain buyers off the market and allow the long-term play investors to flourish in the upturn.
- Crypto use in Web3
Cryptocurrencies are vital in the oncoming Web3 era. Web3 platforms will function via digital currencies in access and exchange value in their decentralized platforms.
- Crypto markets are resilient.
History has proven that the crypto market is resilient. It defies all odds rising above every winter due to enhanced innovation.
- Many crypto assets are undervalued.
Some technical analysts say that prominent crypto coins are highly undervalued. That said, investor confidence is still low, but these coins promise exponential gains as they show more stability in their innovation cycle.
However, is cryptocurrency safe?
The virtual currency market is no longer an outlier but is riddled with massive levels of mistrust, unlike its traditional counterpart. Low levels of distrust have adversely impacted the crypto banks sector, causing great angst.
As an illustration, Alex Mashinsky, Celsius Network ex-CEO, withdrew $10 million in funds from the lender weeks before freezing investor accounts. On the other hand, the Terra Network crash led to losses of over $60 billion worth of investor capital. Such cases have caught the attention of financial regulators, who now seek control of decentralized platforms.
Then, investors lost over $2 billion to DeFi and exchange platform scams, hacks, and exploits in 2022. These events have shaken many retail and institutional trust, leading to a huge diversion of liquidity from the already shaken market.
Support for Cryptocurrency Safety
That said, despite the high level of mistrust in DeFi platforms, cryptocurrencies are safe because digital currencies such as ETH and BTC run atop peer-to-peer networks powered by blockchain technology.
Blockchain technology’s distributed ledgers record all crypto transactions, then publicly broadcast them to a public network. Cryptocurrencies also use ultra-secure cryptography to secure their data. On top of that, they employ decentralized volunteers or nodes to sign cryptographic hashes that validate and verify all transactions. These processes make cryptocurrency transactions irreversible, immutable, transparent, and verifiable.
Bitcoin and ether have thousands of nodes on their networks. Individual nodes store crypto transaction data to ensure that if a hacker changes any data on other nodes or servers, thousands of nodes will pick up the slack and avail real historical data. Nodes protect the value of these cryptocurrencies, and a single entity cannot hack blockchain ledger data and manipulate it for its benefit.
It follows, then, that Bitcoin and Ethereum networks have not been hacked since the 2009 and 2015 launch of their mainnet. To hack them, a hacker would need to control at least 51% of their network nodes, a feat that requires astronomical use of resources. It is nearly impossible to hack a decentralized network of nodes.
To this end, the answer to the question “is cryptocurrency safe?” is also a resounding yes. That said, most crypto networks are not as decentralized as the two-leading public blockchain networks are.
Consequently, less decentralized blockchain ledgers such as Ethereum Classic, Bitcoin SV, Bitcoin Gold, Vertcoin (VTC), and Litecoin Cash have experienced a “51% attack” or hack.
So, how did hackers pilfer$2 billion from investors in 2022? Crypto hackers loot billions of crypto funds from investors by exploiting vulnerabilities in the sector’s platforms. Most hackers target third-party online wallets, exchanges, smart contracts, and cross-chain bridge codes.
Fraud cases are prevalent in centralized platforms such as the Terra Luna and Celsius networks. This is because these platforms’ functions were under the control of go-betweens or management parties.
Fortunately, blockchain technology eliminates the presence of intermediaries in the transaction process. It, instead, creates trustless networks devoid of mediators or central points of failure.
How to minimize risks associated with crypto investment
Any investor that invests in tried and trusted decentralized cryptocurrencies such as BTC and ETH has made a safe bet. So, how can you gauge the level of decentralization in a blockchain network? Below are crypto tools to ensure you only invest in safe, highly decentralized assets.
Use market trackers to research factors such as an asset’s trading volume, market cap, historical performance, and price updates. Trackers such as CoinMarketCap will provide an accurate view of an asset’s performance in the market. As an illustration, a low trading volume but a high market cap asset could be risky.
Data aggregators such as Glassnode provide an in-depth analysis of an asset’s current and future performance. In addition, data aggregators can provide useful data such as asset decentralization metrics and other useful on-chain metrics such as whale movements, hash rate, and gas fees.
Crypto news websites
Independent crypto news sites such as CoinTelegraph, CoinDesk, or Decrypt provide sound market news. These sites will keep you updated on market events, criticisms, and other technical indicators that will help you make safe cryptocurrency investments.
Crypto forums and podcasts
In-depth research will steer you away from risky assets. You can do your research by listening to the crypto sector podcast and joining debates on forums. Here, you will meet investors and enthusiasts with all the best information on the market and are willing to answer any safety questions you might have.
How to protect your investment from DeFi and exchange platforms crypto hacks or scams?
- Do not store your crypto assets on an exchange or hot wallets. Instead, invest in a safe hardware wallet. “Not your keys, not your coins” is one of the best adages to live by in the crypto world.
- Invest in platforms that abide by the principles of decentralization. The safest DeFi platforms also provide smart contract audits from firms like Certik.
- You can lose your crypto asset to social engineering tricks. Protect your privacy online and boost the security of your gadget to steer clear of hackers.
- Do your research and avoid investments in assets designed with “rug pull” or “Pump and dump” tactics in mind. Do not purchase an asset out of FoMo simply because an influencer refers to it as the next big thing. Instead, only invest in a project designed by reputable, well-known, and doxed teams. In crypto terms, a doxed entity has publicly provided identifiable and verified data about itself.
So there you have it. Cryptocurrency is a safe investment in 2022, but you must do your homework. The investment is still considered speculative and no one knows where its value will go. The high-risk-reward profile is exciting, but needs to be weighed carefully before putting your money in a cryptocurrency wallet.
Theresa is a personal finance blogger. She writes content for busy professional women to take control of their money and investments. She enjoys reading, traveling, cooking, and writing. Her work has been featured on GoBanking Rates, Your Money Geek, Savoteur, the Corporate Quitter, Thirty Eight Investing, and more.