1. Understand the risks
It’s important to understand all of the risks that cryptocurrencies are exposed to. A deeper understanding of these risks will make you more aware, better prepared and better equipped to handle them.
Generally speaking, cryptocurrencies are subject to three key risks:
Digital assets are prime targets for cybercriminals and hackers. But users should understand that blockchain technology has been developed to be incredibly resistant to cybercrime.
Bitcoin’s blockchain network, for example, uses a double SHA-256 hash function — commonly used for digital signatures and authentication — which is incredibly secure. Furthermore, since all transactions are stored on a block that is connected (or chained) to a previous block, a hacker needs to crack all the blocks simultaneously to disrupt the network.
That has never happened to Bitcoin.
Of course, third-party services such as exchanges and wallets are certainly vulnerable to cyberattacks. This is usually how Bitcoin is lost to cybercriminals.
Cryptocurrencies are relatively more volatile than mainstream asset classes. That means the price of bitcoin swings more wildly than stocks, bonds, real estate or gold.
According to portfolio optimization specialist MacroAxis, the Dow Jones Industrial Average — a collection of blue-chip names in the U.S. — has a standard deviation of roughly 1.0. By comparision, Bitcoin and Ethereum have standard deviations of 4.0 and 4.5, respectively.
Put simply, bitcoin’s price can vary greatly from its long-term average.
The risk of being scammed by malicious creators or developers is a genuine risk for crypto investors. Projects like Bitconnect are an example of what could go wrong.
2. Follow reputable sources
Now that you’re aware of the big risks, focus on cultivating the right sources of verified information.
Ethereum founder Vitalik Buterin’s Twitter account, for instance, is one of the best source of updates on the Ethereum network’s development.
Meanwhile, Bitcoin.org, Binance Academy and Cointelegraph are great sources for general crypto news and technical information.
3. Focus on mainstream assets
Newer cryptocurrencies and digital assets are at higher risk of fraud and relatively more volatile. On the other hand, the biggest cryptocurrencies with long track records are relatively safe options.
Bitcoin, for instance, has been active for over 12 years. The chances of it being a fraud scheme are relatively slim. It’s also less volatile than smaller cryptocurrencies. Other mainstream crypto plays, such as Ether, Solana and USD Coin, are also less risky, generally speaking, than new niche cryptos with anonymous developers.
4. Use the right tools and best practices
Over the past decade, the crypto community has adopted safety practices and developed new tools to protect their assets.
Beginners should consider adopting these tools and practices too. Taking your crypto off exchanges and storing it offline on a device like Ledger is probably a good idea.
You should also be wary of any links in suspicious emails or text messages to avoid phishing scams. Securely storing your private key is another critical step that can help you invest in crypto safely.
5. Start small
Security becomes more complicated when there’s a large amount of capital and a wide range of digital assets on the line.
Consider starting with a small amount of money and relatively few digital assets in order to make your crypto portfolio more manageble. You can always scale up as you get better at following all of the security protocols and best practices outlined above.
If you’ve followed all the steps mentioned thus far, your digital assets are relatively well-protected.
But these steps cannot fully mitigate the risk of loss. Crypto remains an emerging asset class and is highly volatile. That’s why it’s important to invest only a tiny fraction of your total wealth.
Cap your exposure to an amount of money you can comfortably lose.
The bottom line
Crypto investing isn’t for everyone.
If you’re looking for safe, predictable returns and security guarantees from third-party service providers, this asset class may not be suitable for you. But if you’re looking for an outsized return or portfolio diversification (and understand the many risks going into it), crypto assets could be an ideal bet.