How safe are cryptocurrencies in 2020
Wednesday, 28 October 2020

 When discussing the topic of cryptocurrencies, one of the biggest hesitations of new investors is linked to their safety. How can you possibly trust something so expensive when it comes from an anonymous founder? 

How can you buy Bitcoin if you cannot even touch it?


Sure, the doubt is justified. After all, you most likely don’t know how cryptocurrency works, and why it is such a great investment. If you can identify with this description then you have come to the right place. In the next few chapters, we will briefly discuss how and why cryptocurrencies are safe to use and which coins to avoid. Ready to delve in? Let’s get started.

What makes cryptocurrencies safe?

Much like any other type of investment, the safety of a cryptocurrency depends on its reputation, past performance, and fundamental characteristics. However, it is important to point out that the word “safe” means different things to different people:
  • For those looking to profit from short-term investments, “safe” could relate to the world “non-volatile”. In this case, you might want to invest in popular cryptocurrencies that have shown strong resistance against the fluctuations of the bear market (BTC, ETH, BNB, etc.)
  • For those looking to invest in the long term, “safe” could relate to a “high chance of survival”. We will further analyze this in the next chapters but it’s good to keep in mind that, in this case, it is important to learn how to perform fundamental analysis.
Criteria of “safe” cryptocurrencies

Obviously, no cryptocurrency is 100% safe - not even stablecoins which seem to be tied to the price of the US dollar. That being said, there are certain pointers that you can keep in mind to ensure that your investment goes into “safer” options.

1. The founders are well known for their contribution to the blockchain and/or fintech space. If a founder is anonymous, the project will carry significant risk and is best to avoid. Obviously, this is not true for Bitcoin, which is already established as the most popular cryptocurrency.
2. The safety and longevity of a project can mostly be observed when doing fundamental research. So start by carefully reading the whitepaper and look for red flags.
3. Make sure that the whitepaper is original and not copied from another source.
4. When reading about the distribution of funds, make sure that the funds allocated towards the founders represent only a small percentage of the total supply available in the market.
5. The funds allocated towards the team and early investors are locked in smart contracts and released partially over a longer time. When looking at well-established projects, this period should be at least 4 years into the future.
6. Finally, do your due diligence to understand if the project abides by all existing regulatory frameworks and is, therefore, legal. Just recently, exchange platform OKEx came under questioning for potentially illegal practices, which put its exchange token (OKB) at great risk.

2020 is a relatively risky year for crypto

Since we are always talking about the safety of cryptocurrencies within 2020, it is important to point out that this year has been full of (unpleasant) surprises. While the market seems to be recovering from its lows, there is still a high chance of increased volatility. This is because of several things:

  • Economic uncertainty - The pandemic-related lockdowns have stirred up the order of our financial system, making it difficult to predict the future of crypto. For many, money that used to be allocated towards high-risk investments is now being used to cover basic needs. On the other hand, the higher inflation rates and lower interest rates could act as a positive occurrence for the growth of cryptocurrencies.
  • Presidential elections - On November 3rd, the USA will undergo a new round of presidential elections. After the elections are completed, we can expect some turmoil to build up across the country, which could lead to further financial uncertainty.
  • Adoption or preventative measures? - Many corporations are currently entering the crypto space, betting big on Bitcoin. Companies like Square, Microstrategy, and Mode Digital are buying up BTC to protect themselves from the current economic uncertainty. But is this move aimed towards the long term, or simply a temporary “band-aid” solution? Only the future will tell.
If it was safe it wouldn’t be as valuable

As with most investments, so with crypto, you will need to take a leap of faith and invest with a future expectation of its price performance. The asymmetric risk-reward opportunity of the popular cryptocurrency would not be in place if the investment was as safe as other low-risk options, like stocks and bonds.

However, knowledge always comes through understanding what it is you are investing in. The more you look into blockchain technology and its potential applications, the more aware you will become of the future of cryptocurrency, which will eventually lead you to make better long-term investment decisions. Safety is simply a sense of comfort and security, and in the case of the crypto industry, this can be obtained by knowledge and experience.
Wrapping up
Cryptocurrencies will continue to be a controversial investment for the next few years, or at least until we see a nation/state entering the space and proving that the concept has growth potential. Until then, you should keep in mind that we are still very early in the adoption curve, and those who are willing to take a risk will be the ones who will be rewarded the most.

As such, we invite you to educate yourself by reading upon great Bitcoin and cryptocurrency resources. Start by looking into the following:

Bookmark the resources above and start learning more about cryptocurrency. It is the best way to increase your level of understanding and learning how to differentiate the safe from the risky investment options.
 
 
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Jean-Jacques Rousseau
 

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