HOW SAFE IS CRYPTO?
Cryptocurrencies have become insanely popular over the past few years. With the increasing popularity, there is a constant increase in demand for blockchain developers which is the underlying technology of cryptocurrencies such as bitcoin. In this article, we are going to understand is crypto really safe?
Before moving forward, we would like our audience to know that this article is only for knowledge purposes and in no way ZFunds is promoting the use of crypto or promoting its users and readers to start trading or investing in crypto.
WHAT IS CRYPTOCURRENCY?
Cryptocurrencies are a virtual or digital currency that is meant to be a medium of exchange. It is quite similar to real world currency, except it does not have any kind of physical presence or embodiment and it uses cryptography to operate.
Because they operate in a decentralised manner and independently, without a central authority or bank, new units can be added only after certain conditions are met. For instance, with bitcoin, only after a block has been added to the chain will the miner be rewarded with bitcoins and this is the only path from which new bitcoins can be generated. The limit for bitcoins is 21 million and after this, no more bitcoins can be mined or produced.
WHAT IS CRYPTOGRAPHY?
Cryptography is a method of using decryption and encryption to secure communication in the presence of 3rd parties with ill intent, i.e. 3rd parties who want to steal user data. Cryptography uses computer algorithms such as SHA-256 and other languages, which is the hashing algorithm that bitcoin uses; a public key, which is like a virtual identity of the user shared with everyone and a private key which is a virtual signature of the user that is always kept hidden.
SECURE VS SAFE INVESTMENT
Kudos to the blockchain tech, Bitcoin and other crypto transactions may be inherently more secure than other types of digital transactions such as net banking or online banking, peer to peer payment services or money transfers through digital wallets. But it is important to emphasize that these services all use state of the art tech to protect the funds digitally. Also, most banks and FIs offer fraud protection so that if your account is hacked, the bank will return the missing funds upto a certain amount which varies by institution.
The tech used to keep crypto secure is somewhat effective. But since it is not regulated by anyone and has high risks, it is very hard to comment on the safety aspect.
WHY CRYPTO IS SO RISKY?
Although the crypto investments can be secure that does not mean they are safe by any means. There are 2 elements that make crypto riskier than holding cash in a bank account: lack of federal insurance and regulation and market volatility.
When you hold your money in a bank account or in an FD, it is insured which means if you have your own accounts and investments with banks, they are insured at a high level. If the bank goes out of funds, you will most likely receive your money.
On the other side, if something happens to the company holding the crypto investments, investors can end up losing 100% of their investments. Crypto like stocks and other investment alternatives also tend to fluctuate and that too wildly. When you hold cash in a bank, the value of the money will fluctuate marginally based on inflation or deflation. That represents the value of the dollar. But it is highly unlikely that you will gain or lose amounts overnight.
Crypto can be highly volatile. In one day, a coin can move 20% or more and some newly invented coins can jump 40x in their initial phase.
Another concern with crypto is for those seeking a safe haven for their money. Occasionally, a newly invented coin will be a complete scam and the founders will take the money and disappear leaving them holding a worthless coin.