This week, many investors had a front-row seat to the conflict between two of the largest cryptocurrency exchanges, FTX and Binance. The aftermath shows a grim picture of frightened investors looking for a way to minimize risk and cut their losses after some steep declines in popular coins like Bitcoin and Ether.
Others are taking this opportunity to capitalize on plummeting prices and “buy the dip.”
Whether you’re interested in buying or selling crypto, the most popular avenues usually involve purchasing or selling coins through an exchange via an app or a website. But what’s the safest way to go about buying and selling your cryptocurrency? Well, it’s complicated.
Cryptocurrency is inherently risky
Crypto is still the new kid on the block when compared to other assets. There’s always some level of risk involved when it comes to investing, but as a newer, alternative investment, risk is almost certainly part of the deal. What makes crypto attractive to so many investors is the loose regulations around this investment. Compared to other types of assets like stocks, cryptocurrency is not currently well-regulated.
The downside is that putting your funds behind crypto exposes you to greater risk of fraud, losing your funds in the event of bankruptcy, and major losses due to increased volatility.
Many crypto enthusiasts argue that regulation could stunt innovation and defeat the purpose of decentralized currency, which is to cut out middlemen like big banks and the federal government. But industry pros argue that the cryptocurrency market is flawed in a big way, and investors are paying the price.
“Many crypto–assets operate on open, permissionless networks that allow anyone, anywhere to trade on the network, which—by design—makes it difficult to track individual actors,” said FDIC Acting Chairman Martin J. Gruenberg at the Brookings Institution on The Prudential Regulation of Crypto-Assets. “This design feature also makes it nearly impossible to ensure compliance with anti–money laundering and counter terrorism financing requirements.”
The benefits of investing in crypto
Still, even with the potential risks associated with investing in crypto, cryptocurrency can be a valuable way to diversify your investing portfolio and spread your risk across a few different asset classes.
Some investors regard cryptocurrencies like Bitcoin as a valuable hedge against inflation because there are a fixed number of coins that can be mined, unlike regular currency controlled by the central bank which sees regular increases and decreases in supply—although some experts say this has changed over time.
How to invest safely
If you’ve decided to invest in crypto, there is no surefire way to eliminate risk, but there are a few steps you can take to invest safely.
- Use a secure device: Public computers and WiFi networks expose you to potential fraud. When you purchase crypto, you’ll likely be asked for personal financial information that you wouldn’t want hackers to get their hands on. Opt to use your personal computer and a virtual private network (VPN), which helps establish a secure connection between you and the internet and keeps your sensitive information safe.
- Choose a reputable exchange: You’ll want to scope out different crypto exchanges and compare the cryptocurrencies being offered, fees associated with buying and selling crypto, as well as the exchange’s track record. Do your research to determine if this exchange is well-established and if there have been any security breaches in the past. Read each exchange’s user terms and agreements carefully to learn more about where your funds are kept and what happens to your money in the event that the exchange goes bankrupt. You may also want to spend some time combing through user reviews to find out if there are any major red flags you should be aware of.
- Think carefully about how you plan to store your crypto: When you invest in crypto, you have the option of keeping your currency in a web-based wallet hosted by your exchange. While this may be a low-lift option, it could cost you down the line if you need to turn your coins into real cash or if your exchange fails. Alternatives like “hardware wallets” keep the private key to your cryptocurrency safe in an offline storage device.Alternatives like “hardware wallets” keep the private key to your cryptocurrency safe in an offline storage device.
- Consult your budget: Whether you’re investing in crypto, stocks, bonds, commodities, or any other kind of asset, you’ll need to carefully evaluate your current financial situation to determine how much you can comfortably afford to invest. There are no guarantees in the investing world and it’s never a wise idea to put more on the line than you can afford to lose.