Cryptocurrencies may be more secure than other types of currency, and riskier in others. Before buying or selling crypto, you’ll want to be aware of potential scams and other pitfalls to look out for.
11 min read
The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products, or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset. Cryptocurrencies are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.
Compared to traditional currencies, cryptocurrency has unique security benefits and equally unique risks. It’s known both for its market volatility and innovative safety features.
Investing in cryptocurrency means that you need to navigate a lot of ups and downs and fend off potential scams. But it’s also a frontier of financial technology, and global interest in crypto is growing.
Secure practices for purchasing, storing, and investing in cryptocurrencies are crucial to keep assets safe. When trading crypto, it’s also important to make informed decisions and maintain a diversified portfolio.
Is cryptocurrency safe? It’s a legitimate question, given the recent spike in cryptocurrency trading and governments’ struggles to keep up with consistent regulation. Cryptocurrency’s security—or lack thereof—will likely continue to be a more pressing issue in the years ahead, as a recent report from Allied Market Research projects the global crypto market to more than triple by 2030.
The answer to how safe crypto actually is, at least for now, is complicated. Yes, cryptocurrency does come with some security risks that you should know about before making your first trade. Firstly, crypto is still an extremely volatile asset class, prone to roller-coaster fluctuations in price. Secondly, this relatively new—and relatively unregulated—financial ecosystem comes with its share of scammers looking to prey on unsuspecting newcomers. But crypto has some security benefits that make it appealing as well. In this article, we’ll review the main security points you should know before diving deeper into crypto.
Is cryptocurrency safe—and how can you safely invest?
When someone asks if buying and selling cryptocurrency is safe, they may be asking one of two questions:
Is crypto a risky investment that could go down in value quickly?
Does crypto have security risks that could result in me losing money via a scam or other type of fraud?
Since these are fundamentally different questions, we’ll address each of them individually.
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Compared to other asset classes such as stocks and government bonds, investing in cryptocurrency can be considered very risky. While cryptocurrencies are generally seen as legal across Europe, many aspects of cryptocurrency remain unregulated—or may be subject to shifting regulations. Fluctuating regulations are part of what can make crypto markets more vulnerable to instability—as we saw in the summer of 2021, when China’s crackdown on crypto-related activities coincided with a drop in Bitcoin’s price. With so many world governments weighing how to react to crypto’s rise, there are a lot of factors that may contribute to crypto’s volatility moving forward.Another part of crypto’s general volatility comes from the fact that it’s still relatively new, and investors may not know exactly what to make of it yet. Because crypto doesn’t have the same historical proof points of other asset classes, like stocks, it may be more prone to huge price swings that come with shifting investor sentiment. Some cryptocurrencies are more prone to this than others, but even Bitcoin, the oldest and biggest crypto by market cap, is known for alarming price swings.If you invest in cryptocurrency, you can mitigate the risk by not buying more than you can afford to lose. There is still a non-zero chance of any crypto asset plummeting in value on a given day, so exercise caution and consider a diversified portfolio of investments with crypto playing a smaller and more speculative part.
Are there security risks associated with cryptocurrency?
Yes, there are some security risks you should be aware of. We’ll break them down here.
Paying with crypto comes with limited legal protections. Payments with traditional debit and credit cards offer certain security features that crypto doesn’t. For example, in some cases you may not be liable for fraudulent purchases made in your name. This generally is not the case with cryptocurrency. If you lose your money to a scammer, you may not have any real way to get it back.
Cryptocurrency scams are common. Maybe you’ve already received an email with a threat to reveal compromising photos of you if you don’t pay a certain amount in Bitcoin. Or maybe you’ve received a suspicious message congratulating you for winning a rare NFT or a large pot of cryptocurrency. These are just a few examples of scams to look out for. In general, if someone is asking you to pay them in crypto and refusing other types of payment, they may be attempting to steal your money. And if someone pressures you to pay with crypto in any other way, chances are high that they may be trying to scam you.
You can’t “take back” a cryptocurrency transaction. Many cryptocurrencies use blockchain technology to create a secure, public, and uneditable ledger of transactions. This technology comes with security benefits, but it also means that crypto transactions are generally not editable or reversible after the fact. If you pay somebody with crypto, there’s typically no customer service agent you can call to process a refund if things go sour.
These are just a few of the security risks associated with cryptocurrency, but there are others that continue to crop up as the crypto ecosystem evolves. The U.S. Federal Trade Commission updates its information on crypto scams and security as they develop, so it may be worth checking every so often.
What’s the most secure way to buy cryptocurrency?
With the rise of crypto has come a similar rise in the number of online exchanges and marketplaces where users can buy and sell crypto. As a general rule, the safer online platforms tend to ask you to prove your identity, as they follow Know Your Customer (KYC) and Anti Money Laundering (AML) guidelines. Many popular crypto exchanges, such as Coinbase, require customers to verify information about themselves before they gain access to certain trading features. If you’re just starting out in the crypto world, it’s generally a good idea to go with an exchange or marketplace that takes security seriously and implements these types of steps to verify your identity.At N26, your security is our top priority. You can read more about the security measures we implement to protect all your transactions.
What’s the most secure way to store cryptocurrency?
Generally speaking, the most secure way to store cryptocurrency is to keep it offline and away from those who might be able to use an internet connection to get their hands on it. You can keep your crypto offline if you use a hardware wallet—also referred to as a “cold wallet” or “cold storage.” Digital wallets (i.e. “hot wallets”), which can be online or on your desktop, may be more vulnerable to theft from hackers. There are various types of crypto wallets to choose from, including hardware wallets offered by well-known names such as Ledger and Trezor. The downside of hardware wallets is that they can be pretty expensive, and you’ll need a recovery seed to regain access to your crypto if you lose or misplace your wallet. Still, they probably represent the safest option at this point.
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To put it simply—there isn’t a “most secure” cryptocurrency. This doesn’t mean some cryptocurrencies aren’t likely more secure than others. Cryptocurrencies like Bitcoin and Ethereum are said to have some inherent security features thanks to their use of decentralized blockchain technology, and the wider adoption of these cryptocurrencies (relative to other so-called “altcoins”) may make them less prone to massive price swings. It’s worth noting here that security is part of the appeal of decentralized blockchain technology. Bitcoin itself was created in order to give buyers and sellers more security in their transactions and avoid the need for a trusted third party. To read more about blockchain and security, check out our guide to blockchain technology.
Is there deposit insurance on cryptocurrency?
Cryptocurrencies themselves aren’t covered by deposit insurance schemes that protect traditional bank accounts or investments in many countries. These insurance schemes are designed to safeguard depositors' money if a bank fails, but they don’t extend to investments in cryptocurrencies. Because cryptocurrencies operate outside of the traditional banking and financial systems, they don't benefit from these protections.
5 cryptocurrency risks to consider before you invest
Before buying or selling crypto, it’s worth understanding some of the key risks of cryptocurrency. Here’s 5 points worth considering:
1. Blockchain technology is still relatively new
Blockchain’s cryptographic nature—as well as the decentralized peer-to-peer network that validates transactions—provide some inherent security features. For example, the use of encryption with hashes and timestamps makes it virtually impossible to alter the data in a block once it’s been added to the blockchain. But decentralized blockchain technology is still relatively new, and we’re still figuring out how to best use and regulate it. In the meantime, some criminals have been able to take advantage of the anonymity offered by crypto to scam users, who may have little recourse to reclaim their assets.
2. Cryptocurrency is an extremely volatile investment
Cryptos tend to be unstable investments, so don’t be surprised to see their value go up or down by very significant amounts. In fact, they’ve been known to rise and fall by double-digit percentages within the span of hours. Past performance isn’t a good indicator of future performance when it comes to any risky investment—and that certainly includes cryptos. All this said, you shouldn’t invest more than you can afford to lose.
3. Cryptocurrency scams are a growing concern
Unfortunately, the world of cryptocurrency is awash with scams. Criminals may use fake apps, crypto wallets, and emails to lure you into giving up your private keys, giving them access to your crypto assets. NFT scams are also increasingly common, with some buyers being duped by fake accounts with fake names, or promised royalties that never materialize. Cryptos themselves can also be quite scammy in nature. This was the case with the Squid Game token, which had a built-in mechanism that prevented many holders from reselling their tokens.
4. Cryptocurrencies are still largely unregulated
Despite some moves around the world to regulate cryptocurrencies, they remain less regulated than many other asset classes. If a platform that exchanges or holds your crypto assets goes bankrupt, there’s a risk you could lose all your capital. Similarly, your assets could be at risk if an exchange holding your crypto is hacked by criminals. In addition, cryptocurrency taxation is in its infancy, and future changes could have ramifications for your investments.
5. Diversity is key
There are thousands of cryptocurrencies, and many of them are still in the earlier stages of development. It’s still difficult to tell the ultimate winners from the losers. As with risky investments in general, it’s never a great idea to put all your eggs in one basket. If you choose to invest in cryptocurrency, it could be better to spread your investment across a variety of different cryptos.
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A cautious approach can help you avoid some of the dangers most commonly associated with cryptocurrency. Here are our top tips to steer clear of the pitfalls.
1. Research any exchange before you buy crypto.
In the past, some cryptocurrency exchanges have suffered damaging attacks from hackers. Consider choosing an exchange with strong security features, as well as low fees and ease of use. Before you transact, do some research on the exchange and try to find out what users have to say about it.
2. Research cryptocurrencies before investing in them.
Read the crypto’s whitepaper. Standard for every new currency, this document is designed to help you understand the crypto’s use cases and scalability, and the creator’s plans for the future. You could also join an online cryptocurrency forum to get ideas and tips to supplement your own research. Internet searches may also yield helpful information about a crypto’s track record and reputation.
3. Store most of your crypto in a secure crypto wallet.
Storing most of your crypto in a secure wallet should give you some protection from theft. Using a hardware “cold” wallet can mitigate the risk of losing your crypto to an online hack.
What else should I know about cryptocurrency?
It’s best to get a good understanding of cryptocurrency before you buy, so check out our beginners’ guide to cryptocurrency for additional information. Cryptos are a relatively new phenomenon, so there’s plenty still to learn—including the ins and outs of crypto wallets, NFTs, and blockchain technology itself.
FAQ
In general, cryptocurrencies are considered legal throughout Europe. However, they aren't regulated, so there's a risk of market instability and potential losses for investors. Cryptocurrencies utilize blockchain technology, which has several security features. Transactions are stored in a special code with a timestamp, making it difficult for cybercriminals to access. Many banks are exploring the possibility of integrating this system into their own operations.
Bitcoin is the most recognized cryptocurrency, so it’s generally viewed as one of the safer investments within the crypto world. As with all cryptocurrencies, however, Bitcoin’s price can change dramatically within a short time period. Cryptos are also less regulated than many other types of investment, so there are generally fewer safeguards. When buying or selling Bitcoin, consider using an exchange with a good track record and storing your crypto in a secure hardware wallet.
It’s generally considered safe to exchange cryptocurrency into fiat currency and transfer it to your bank—provided you use a reputable exchange platform to convert it to cash.
If you choose to trade cryptocurrency on your phone, make sure you’re using a safe crypto exchange app with strong security features. Unfortunately, some apps are fake and may be used to steal your private keys, while poor security on others could leave you exposed to hacking attempts.
If a cryptocurrency promises guaranteed returns, that's a red flag — there's a good chance it's a cryptocurrency scam.
To avoid cryptocurrency scams, it's wise to take precautions: only purchase cryptocurrencies through a reliable platform, don't share your public and private wallet keys, think twice before investing in an unfamiliar cryptocurrency, and don't accept gifts or discounts when buying cryptocurrencies.
It might be possible to recover money that you lost to a cryptocurrency scam. Contact your bank if you made a transfer with a card, and get help from professionals who are experienced in cryptocurrency scams.
