Is Investing in Bitcoin Safe?
Bitcoin Safety: The Risks, The Pros (and the Cons)
When new investors ask “Is Bitcoin safe” what they really mean to ask is “can you lose money investing in Bitcoin?” – and the answer is always yes.
As with any investment prices can go up as well as down and in Bitcoin’s case you can amplify this by 100 thanks to the highly volatile nature of the market.
But Bitcoin isn’t just at risk of market price changes. As a wholly digital asset Bitcoin can be stolen by hackers, scammers and fraudsters, lost through software or hardware faults and for those with a paper wallet risks run to being missplaced, burnt, literal rotting or getting thrown out in the trash.
The key to any risky investment is to minimize risks and insure against loss – and thankfully Bitcoin can be made as safe as any investment, all while keeping it’s massive potential for profit.
Bitcoin and Volatility
Bitcoin – and with it the whole cryptocurrency market – is a very volatile asset where steep rises and cliff-like drops can occur almost daily.
No matter which timeline you look at for pricing, you’re always going to see a very mountainous chart.
But it’s this very volatility which can make (and lose) fortunes in even the shortest of windows. As we mentioned in our Why Bitcoin section Bitcoin famously rose from $1,000 to $20,000 in 2017 – a 1,900% rise in less than 12 months making a lot of Bitcoin investors very wealthy.
$25,000 invested at the start of January would have been worth $500,000 in December – a type of gain that’s almost impossible in any other asset.
Similarly back in 2011 when Bitcoin first hit parity with the US Dollar, the asset rocketed from $1 to $31.91 in the space of four months. Just $5,000 invested in February 2011 would have been worth $159,550 by June.
The flip side are the crashes following the gains.
Shortly after hitting $20,000 Bitcoin began a cliff-like drop, shedding $15,000 in a few months and making those who were late to the party considerably worse off.
The same has been seen after most of Bitcoin’s big gains, but even after what seems a freefall, the resulting price tends to be higher than Bitcoin’s value was prior to the climb.
Anyone invested before late November 2017 and after late January 2018 would currently be in profit – and as for the example $5,000 invested in February 2011?
Despite a huge drop after it’s initial 2011 gain, that $5,000 would currently be worth $50m!
This is because volatility apart, Bitcoin’s overall trend is historically upwards, averaging a $1,111 annual gain between 2009 and present day. Of course historic gains mean nothing in an uncertain future, but nay-sayers have been avoiding the market for years and have lost out significantly as a result.
Now if you don’t like volatility, then Bitcoin is perhaps not a good investment – but the good news is, like any volatile asset, Bitcoin’s volatility can be tempered by hedging or diversifying with other more stable assets such as gold.
As a higher-risk volatile asset in an otherwise safe and steady portfolio, Bitcoin can bring some welcome profits while it’s risk is offset by the more mundane slow and steady investments.
Whether you’re happy risking 5% or 10% will be down to your personal risk appetite – but just imagine if you’d invested that $5,000 in 2011. What kind of difference would $50 million make in your life?
Bitcoin and Theft
Bitcoin itself and the blockchain it’s built upon is secured and encrypted across thousand of computers around the globe.
The way the blockchain works, to mastermind any kind of theft or fraud on the blockchain network you would need to control over 51% of that network. If you can make 51% of the blockchain computers report that something has happened then to all intents and purposes it has happened…
That’s the theory, but in practice thanks to the decentralized nature of mining rigs powering the blockchain, it would take a vast concerted effort to do this. With Bitcoin’s blockchain it would take the work of nations, combining forces – and while in this is possible, getting enough people and machines in on the scam would be a herculean task especially when there’s an easier route.
Human frailty.
Rather than going after the whole network, it’s much easier to rely on human weakness, greed, fear, stupidity and plain good old-fashioned error.
Rather than attacking the blockchain, the Bitcoin thief simply needs to find any individual wallet’s secret key.
Whether these keys are written down on a piece of paper, stored on a computer or held on a Bitcoin exchange, if they’re outside of the blockchain, then they are relying on human beings to keep them safe.
If you leave your secret key laying around either physically as in a piece of paper, or digitally on your phone, laptop, tablet or PC and don’t have sufficient encryption or security then there’s a good chance it can be taken – and with that any Bitcoin your wallet may contain.
If you keep your Bitcoin in an online “hot” wallet – again it can be hacked or phished, as many thousands have already been. So what to do?
Bitcoin Security
The only way to take this risk out of the equation, is by storing your Bitcoin in a Cold Wallet – and the colder the better.
As with anything coldness can come in a variety of flavors. From a literal piece of paper with your wallet key written on it, to a pen-drive or any other type of physical hardware not connected to the internet – your cold wallet can be almost anything. If you want to be able to access it regularly and enjoy good functionality, then specialist hardware wallets from the likes of Trezor or Ledger make an excellent choice.
Thing is, cold can get much colder…
Offline, sold-state physical devices, or other encrypted wallets stored in a high security bullion-type vault, guarded 24-7 against theft and fully insured against loss is about as cold as it gets.
Despite this seeming a ridiculous level of security – this is what you get as standard from the likes of Coin IRA.
Where a $5,000 investment can become worth $50 million it’s the kind of insurance you need.
The tax-advantaged purchase prices or no-tax on your profits is just the icing on the cake.
Bitcoin and Viruses or Malware
As a digital asset, Bitcoin is capable of being attacked by computer viruses and malware.
Although it’s not the bitcoin itself being attacked, but rather the secret key for the wallet containing the Bitcoin – the effect is the same: loss of Bitcoin.
Viruses are a specific type of malware – designed to spread from computer to computer and carry out a task, be it stealing files, spying or just maliciously breaking things. In Bitcon’s case the malware is wanting to do one of two things:
- steal your bitcoin by taking control of your wallet via your secret key
- mine Bitcoin as part of a larger bot-net using your computer’s power to mine coin on someone else’s behalf.
Malware can steal your Bitcoin by finding out your secret key. It can do this by keylogging everything you type looking for wallet address and key-like strings. It may scan all your files looking for hidden or encrypted passwords and software wallets or connected hardware wallets. It may record your screen while monitoring the sites you visit looking for exchanges. It may even do a combination of those things.
One thing is certain. If you have any keys or encrypted files on your machine, the malware will find them and report back to base. If they’re short of any elements the hackers may resort to phishing to find the missing piece, depending on what they need.
Because of this we’d never recommend keeping any Bitcoin on any internet-connected device, unless you truly know how to safeguard a machine – and even then we’d be reluctant.
Number 2 is more annoying than a direct loss in that it slows down your computer – but it’s also a worry in that if someone has control of one part of your computer, what else can they control?
Making Bitcoin More Secure
Bitcoin is by it’s very nature a secure system – or at least the essential elements that make Botcoin work – the blockchain, the wallets and the method used for transmission / record-keeping.
It’s the third-party elements where risk creeps in.
To minimize security risks, the following tips will enhance your security in increasing stages:
- Avoid keeping Bitcoin in hot wallets
- For that matter, try to avoid keeping Bitcoin in ANY kind of online wallet – at least in any significant value for long periods of time.
- When it comes to storing Bitcoin on a computer, use a trusted software wallet but try to minimize the coins you store on this due to the risk of hacking/malware.
- Better to use a hardware wallet, ideally a trusted cold-storage device and be careful what devices you connect it to.
- Do regular virus and malware scans on the computer you use to access your wallet and always run the connected computer through a good firewall, not just the one it ships with.
- Better yet, use a hardware wallet with a computer you only use for Bitcoin, on a clean install using a secure operating system like Linux. You can increase this security further by using a TOR browser running over a VPN to make your set-up close to unhackable.
The ultimate in security is physically-vaulted cold-storage, where your key/wallet is stored in a Fort Knox-like depository, guarded 24-7 and fully insured for loss.
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Bitcoin Storage Safety Considerations
Taking all of the previous security concerns into consideration, no matter how you store your Bitcoin, the number one rule is to look after your secret key.
Whether you store it on a computer, a pen-drive, written between the pages of several books, hidden inside a painting, carved into a secret compartment of a table or rendered to memory – remember this one thing:
If you lose it, you lose all access to your Bitcoin. Permanently.
Wherever you store the key, do so in multiple places over multiple locations. Hide parts of it in one place, the rest in another. Convert the key to a seed phrase and memorize that. Weave those words into a story, self-publish them in a book where on every 10th page the first word is a word in your phrase.
In fact there are an infinite number of ways you can memorize a seed phrase like this – but however you do so, do it in multiple locations. A third time – multiple locations.
Houses can burn down, homes can flood. If the medium your phrase is written on can be destroyed, thrown out, eaten, stolen or otherwise lost, give yourself as many chances of one example surviving as you can.
Think this is over the top?
Recently the media covered a story of an Irish Bitcoin investor who thought he’d found the perfect hiding place for his wallet’s secret key – inside the handle of an old fishing rod. Time passed and his Bitcoin investments grew in value to $60million. Unfortunately for the Irishman, he did a little time in jail and during his incarceration the landlord at his home decided to clear the property.
All his possessions were sent to the local dump and proceeded to landfill – including the fishing rod – and with that, any chance of ever accessing his Bitcoin wallet.
Thing is, he wasn’t the only one wanting the Bitcoin. The whole might of the law was after the Bitcoin, because under Proceeds of Crime laws, the police were entitled to the full $60 million as a form of fine and this would be a record haul. But even using all the technology and facilities open to them, government intelligence services, cryptography experts and more, nobody could access the wallet.
So one more time. NEVER lose your key.
Insurance For Your Bitcoin Investment
Bitcoin exchanges offer a certain amount of insurance against loss, but this varies wildly depending on the exchange in question.
For example Coinbase is insured both for it’s cold wallets and it’s hot wallets. Where cold wallets are generally safer from hacks, hot wallets are always at risk.
This means it’s rare to find adequate insurance on hot wallets and it’s something to always look for when you’re buying or transmitting Bitcoin and it involves a hot wallet.
Outside of hot wallets on exchanges, most cold wallet suppliers offer a degree of insurance and again this varies by exchange or physical device. Some will be limited up to a certain amount and others will offer full market value on any loss.
Again it pays to read small print and see exactly what kind of loss is covered.
Most policies focus exclusively on physical damage or loss of private keys including employee misuse or theft but don’t cover traditional hacking or other related crimes. They may or may not cover transactional failures or vulnerabilities such as errors or problems with the blockchain itself.
Some of the best cover can be had with Bitcoin IRA providers as not only are they dealing with Bitcoin and cold wallets, but are doing so in high-security vaulting depositories under the watch of IRS vetted custodians.
Will Bitcoin Ever Be Hackproof?
Exchanges can be hacked, hot wallets can be hacked and so can computers – but Bitcoin?
Due to the size of Bitcoin, it’s network is deemed “too big to hack” – meaning it would be all but impossible to take control of 51% of the Bitcoin network. Note we said “all but impossible.”
Bitcoin’s code is open to all, as is it’s ledger – the history of all transactions and the place where all future transactions will be stored. And thanks to this openness, everyone knows it takes “just” 51% of the network to control Bitcoin.
Just is a big word, especially in Bitcoin’s case – as it would involve top-grade hacking, insider payoffs, buy-outs and mining on an epic scale to tip the balance past 50%.
But it’s not only possible – it’s already been done on a smaller network.
In early January 2019, Coinbase’s security team noticed unusual activity on their platform in the crypto Ethereum Classic – it’s blockchain seemed to be under attack. The attacker had somehow taken control of the computing power running more than half of the Ethereum Classic’s network.
By doing this they were able to successfully rewrite transaction histories on the blockchain, allowing them to spend individual coins more than once, a hack known as “double spends.”
At the time of discovery, the attacker had already changed transactions on over $1.1million worth of coins and although Coinbase says no currency was stolen, the same attack lost the exchange Gate.io $200,000.
Now we’ve had a successful 51% attack on a blockchain, theory is no longer just theory.
Granted Ethereum Classic is 0.6% the size of Bitcoin. It’s market cap is only $956 million or 105,619 Bitcoin at current rates – versus Bitcoin’s $165 billion spread over 18,238,512 BTC – but where it’s been done once, who’s to say it won’t happen again?
To reduce the chances of a cryptocurrency’s blockchain being hacked it pays to go big – and bitcoin is as big as it gets, meaning it’s blockchain is still regarded as “unhackable”
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About Tim Schmidt
Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He's also a published author, and his views on investing have been featured in USA Today, Tech Times, The Huffington Post, Nasdaq, and many more.
