Trading Blog | 5 min read 

Is Bitcoin Safe?

This guide provides a quick overview of the five steps needed to trade (buy/sell) cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH) and Ripple (XRP).

Written by Mitchell Roach
Follow me – @mvtchh

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is bitcoin safe - starttrading.com

If you are reading this article you may have asked the question: “Is Bitcoin safe?” This article will try and give you a clear answer.

Firstly, it is good to start with what Bitcoin (BTC) actually is, the topics covered in this guide will give you a very broad overview on what Bitcoin (BTC) is and why it is used.

What is Bitcoin?

Most people that have heard of Bitcoin, otherwise known as BTC, argue that it is very complicated and almost impossible for an average person to understand. We are here to tell you that it is a lot simpler than what most people think. As stated, this is only a broad overview of what Bitcoin is as in to give a bit of background before discussing its safety. If you would like to know more about Bitcoin, we have a in-depth article breaking down exactly what Bitcoin is and how to trade it.

Bitcoin is part of a whole new technology, known as the Blockchain, unlike anything popularized before. Thus, explaining it in terms of recent or past technologies often brings confusion. Rather than Bitcoin being like an already existing technology, see it rather as a combination of pre – existing technologies.

Bitcoin firstly represents a payment system, similar to bank transfers or more popular methods today such as Electronic Fund Transfers (EFT’s). Bitcoin can also be seen as a means of value, such as Gold. Think of using it as money, it has its own value and can be exchanged for goods. Lastly, Bitcoin runs on a technology called the Blockchain, making Bitcoin very transparent and at the same time no single person controls it, similar to the internet.

These three characteristics all come together to create this new miraculous technology known as Bitcoin.

Is Bitcoin Safe?

In this article, we will cover three aspects of safety appertaining to Bitcoin.

  • Firstly, the safety of the technology itself.
  • Secondly, the safety of the exchanges Bitcoin is found on.
  • Thirdly, the safety of investing into Bitcoin.

Safety of Bitcoin and the Blockchain

As with all new technologies, there will be a lot of uncertainty regarding its safety and trustworthiness. Luckily, trust is not needed with Bitcoin.

As stated above, Bitcoin runs on a technology called the blockchain.

“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” – Don & Alex Tapscott, authors Blockchain Revolution (2016).

As we can see from the above statement by Don and Alex, the blockchain is incorruptible. We can see from the image provided above, all transactions that ever take place on this blockchain, in the case with Bitcoin, all Bitcoin ever sent or received, is broadcasted to every part of the network, transferred and captured forever onto the blockchain for everyone to see.

This is clear proof for everyone about how safe this technology is. In fact, it is much safer than technologies we find ourselves using in our daily lives today. Bitcoin solves issues ranging from Financial data manipulation to financial transparency.

Bitcoin Exchanges

Bitcoin interest has expanded all over the world. Bitcoin trading became so popular, several exchanges has popped up worldwide, giving you a chance to buy Bitcoin with fiat currencies or other type of cryptocurrency. Cyber security is naturally a significant part of the Bitcoin exchange issue. We ask the question; can we be sure about the safety of Bitcoin exchange sites?

Major exchanges such as Binance, Bitfinex, BitMex has popped up and has trading volumes that soar up into the millions of dollars, however there are things to consider if you are planning to exchange Bitcoin on them. Before choosing a Bitcoin exchange, multiple vulnerabilities should be considered.

Personal Identity of their customers

One of the biggest security and safety issues appertaining Bitcoin exchanges is the leak of personal information of their customers. During registration on these sites, these sites ask for their customers identity, information, pictures etc. This information can be disclosed by exchanges being hacked. Some exchanges even ask their customers to register by sending a picture of their identity documents.

Some exchanges might even ask a customers banking details, but this is strongly advised against.

By registering on any exchange, we as users take the risk of giving all of our identity information to sites which may or may not be regulated. If these sites by any chance are hacked, it can lead to an unpleasant circumstance for the user due to schemes put in place today such as identity theft etc.

It is advised to research the exchange you buy Bitcoin on thoroughly before registering an account. Keep in mind that any exchange is unsafe, some are just safer than others.

Mismanagement of the exchange

The credibility and safety of any exchange also lies within how the exchange is managed, how customer support interacts with their customers and the transparency of the exchange in terms of fund management, storage and allocation. There have been multiple occasions where customers end up with their accounts being frozen, without any knowledge on why this has happened. These problems indicate weak customer/exchange relationships and zero transparency. It is best to use a Bitcoin exchange where you know precisely the above mentioned and is advised saving your personal Bitcoin funds offline.

How an exchange takes a variety of precautions in preventing any problems in the management of your Bitcoin is the underlying factor that determines the safety of your Bitcoin including the way you buy/ trade and store them.

Security and Maintenance

One of the most common ways Bitcoin becomes unsafe on an exchange is activities such as hacking and phishing. A reminder that this is not Bitcoin itself, but the inability of the exchange to defend against these attacks that makes Bitcoin “unsafe”.

Bitcoin exchanges regularly have to undergo continuous vulnerability management and risk score tests to evaluate and enhance their safety and security. These processes can be tracked by using applications such as CyberRiskScore.

Safety of investing in Bitcoin

Cryptocurrency volatility has made many investors question the safety of investing in Bitcoin (BTC).

The price of Bitcoin can increase or decrease miraculously over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. Thus, some may argue, keeping your savings with Bitcoin is not recommended at this point.

Bitcoin is classified as a high-risk asset, and most risk averse investors do not invest in such assets. These investors usually trade Bitcoin and then convert them into their local currency.Any technology in its early stage has a high risk and would be considered by some as unsafe, but this counts for any type of sector you find yourself in and not only Bitcoin.

As discussed above, the lack of security has also raised concerns about the risk of owning these virtual currencies as hackers continue to breach the exchanges.

The uncertainty and volatility of the price of Bitcoin, emphasizes the hazards investors face daily in their attempt to profit from trading and investing in Bitcoin.

Other factors also influence the volatility such as the debate on whether Bitcoin is actually a currency or an investment continues as the Securities and Exchange Commission considers it a security, the IRS treats it as property and the Financial Crimes Enforcement Network says bitcoin is a currency. This obviously leads to a clash in interest and different sectors value this technology differently.

Due to the fact that Bitcoin has a capped supply, if demand increase then price will increase and vice versa. Due to not a lot of Bitcoin investors and the small market value compared to the stock and forex markets we have today, Bitcoin is indeed very volatile and can be manipulated by big investors. Thus, again, there is big risk and can be interpreted as Bitcoin being unsafe. For those who accept the risk and see Bitcoin rise, will receive their deserved reward.

Additional Information to know about Bitcoin

Bitcoin wallet management

As in real life, with your fiat currencies, your Bitcoin wallet must also be secured. Bitcoin makes it possible to transfer value, in the form of Bitcoin, anywhere in a very easy way. It also allows you to be in control of your money without a third party. Such great features also come with great security concerns.

With Bitcoin, it is your responsibility to practice good behaviours in order to protect your money. If done correctly, Bitcoin can provide very high levels of security.

Bitcoin payments are irreversible

Unlike traditional payment methods, Bitcoin transaction cannot be reversed, it can only be refunded by the person receiving the funds. This means you should take care to do business with people and organizations you know and trust.

Additional services might exist in the future to provide more choice and protection for both businesses and consumers but for now be very cautious while making these payments.

Anonymity of Bitcoin

As stated earlier in this article, all Bitcoin transactions are stored publicly and permanently on the network (Blockchain), which means anyone can see the balance and transactions of any Bitcoin address. Not to worry, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances between the buyer and the seller, if decided upon.

Bitcoin is still in an experimental stage

Bitcoin is still in active development and this is definitely one fact many people choose to ignore or simply do not know about. Each improvement makes Bitcoin more appealing but also reveals new challenges as Bitcoin adoption grows. During some of these growing stages, one might encounter increased network fees, slower confirmations, or even more severe issues. Thus, it is advised to always be prepared for any possible problems and/or consult a technical expert before making any major investments.

Legalization of Bitcoin 

Bitcoin is not yet an official currency in most parts of the world. That being said, most jurisdictions still require you to pay income, sales, payroll, and capital gains taxes on anything that has value, including Bitcoin. Thus, it is your responsibility and duty to ensure that you adhere to the tax and other legal or regulatory mandates issued by your government and/or local municipalities.

Conclusion

The question, “Is Bitcoin safe?”, really depends on more factors than Bitcoin, the technology, itself. As we have seen through this article, a Bitcoin exchange has a massive impact as well as the Bitcoin market itself. The answer is basically, yes and no. Both arguements have valid points. Yes, the technology is one of the ‘safest’ we have seen in a long time, otherwise Bitcoin would not have risen as high as it has. On the other hand, no, due to the way people make use of it and/ or the platforms and their inability to safely exchange and provide their users with safety and security. It is all up to the individual, their risk tolerance and the effort of doing things right in regard to Bitcoin attainment and control.

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At starttrading.com, our goal is to empower you to become a more successful trader and unlock financial freedom. We provide you with the information and educational content needed to learn how to trade.

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