Let’s first look at the security of your cryptocurrency investments.
Security
Security is a major issue for cryptocurrency investors because crypto assets don’t have the same protections equities in a brokerage account or cash in a bank. If your crypto platform fails, you could lose the assets deposited there. It’s important to use a reputable exchange or broker and to look at the crypto exchange’s security features.
Watch out for these factors:
- Percentage of assets kept offline in “cold storage.” Most of the top cryptocurrency exchanges keep the bulk of their digital assets in cold storage. This means they are stored offline, making them harder to hack or steal. In the earlier days of cryptocurrencies, there was a greater risk of exchanges being hacked, but these issues have largely been dealt with.
- Whether it has private insurance. Third party insurance could cover your funds in the event of platform failure or a security breach.
- Third party audits. Some crypto exchanges publish proof of reserves to demonstrate that they have enough funds to cover client deposits. Look for platforms that use reputable external auditors.
- Whether the platform has ever been hacked. If the exchange has been hacked, look at how it handled the issue and whether it made customers whole.
Bear in mind that you’ll need to take steps to secure your account too — even the best app for cryptocurrency won’t be protected if you don’t enable two-factor authentication and set up strong passwords.
You may also opt to keep your cryptocurrencies in a separate digital wallet of your own. You could even use a hardware wallet to create your own offline storage. This gives you more control over your crypto, but also pushes more responsibility onto you. For example, if you lose your security credentials, you could lose access to your crypto completely.
Now let’s consider safety from an investment perspective.
Investment volatility
It’s important to point out that cryptocurrencies — even Bitcoin, the largest and most-established one — are a young asset class and are rather volatile. This is especially true for the smaller cryptocurrencies in the market. So, you need to be ready to withstand major price swings over time.
Many experts recommend allocating no more than 5% of your portfolio to riskier assets like cryptocurrency, but it depends on your risk tolerance. If you want to build long term wealth, try to create a balanced portfolio that also includes other assets such as stocks, bonds, cash, real estate, and commodities like gold. And, just as with other investments, don’t invest money you can’t afford to lose.
