Bitcoin, the king of cryptocurrencies, has disrupted the payments industry with its application scenarios in digital payments.
Before Bitcoin’s creation by the almost mythical Satoshi Nakamoto, the process of cross-border payments was hectic. For starters, those in unbanked populations had nearly no means of obtaining remittances. Moreover, intermediaries slow down the costly process of cross-border payments.
As a digital currency, Bitcoin has made transactions more straightforward, accessible, and cost-friendly.
Bitcoin also comes with an element of security. The security of the Bitcoin network is multi-layered. The Bitcoin network is impenetrable through mining, block confirmations, and transaction hashing. To contextualize this, no Bitcoin has ever been stolen from the blockchain since its inception.
This article will explore the safety aspects of utilizing Bitcoin for transactions and investments.
Security features of Bitcoin
The technology backing Bitcoin is impassable. The only weakness to Bitcoin’s safety is human error, where people are duped through scams.
Blockchain technology as a security foundation
Bitcoin is backed by blockchain, which is a superior technology compared to what is used in traditional finance. Blockchain leverages cryptography and secure core concepts. The Bitcoin network operates in a manner wherein transactions are irreversible, and Bitcoin’s data security is robust.
Distributed ledger uses hash functions to create a unique fingerprint for each transaction. After the transactions are signed and verified, they are sent to a “block” containing other transactions. It is impossible to modify a block.
Bitcoin also promotes immutability, where data or transactions stored in the blockchain cannot be manipulated, modified, or falsified by a third party.
Cryptographic protection
Bitcoin uses public-key cryptography to create a key pair that offers Bitcoin access. This key pair has a private key and a public key. The public key receives funds, while the private key signs transactions for spending these funds.
The technology capability of the Bitcoin blockchain ensures secure transactions and guarantees that user assets are kept safe.
Risks and considerations
Bitcoin is a major technological revolution. However, the coin is still in the nascent stages. During the first few years after launch, Bitcoin was worth basically nothing. However, it has significantly gained in value. Bitcoin was trading at around $61,300 on May 9, 2023, at 09:32 EST, according to CoinGecko.
Price volatility
Bitcoin often witnesses bouts of price volatility. In 2021, Bitcoin tanked from an all-time high of above $60K to below $30K within a month after China announced a ban on cryptocurrency mining and trading.
Bitcoin also started in 2024 with volatility as traders anxiously anticipated the approval of the first Bitcoin exchange-traded fund (ETF) in the US. After spot Bitcoin ETFs began trading on January 10, 2024, Bitcoin rallied to an all-time high of around $73,000 after several weeks.
Traders can protect themselves from Bitcoin’s volatile price action by making informed trading decisions. This involves not trading out of fear or greed. Indicators like the Bitcoin Fear and Greed Index can help you analyze market sentiments. Technical indicators will also help you to open and close trading positions at the right time.
Below is the Bitcoin Fear & Greed Index movement relative to Bitcoin’s price over the years.
Regulatory landscape
The crypto regulatory framework has been evolving globally. In the US, the Securities and Exchange Commission (SEC) has been criticized for failing to outline a clear regulatory framework. On the other hand, Europe has been hailed for its comprehensive Markets in Crypto Assets (MiCA) framework.
Due to the uncertainty around crypto regulations, traders are always advised to ensure that crypto trading is legal in their countries. Crypto firms have also been racing to achieve compliance to continue operations.
Scams and fraud
One primary concern facing Bitcoin and the crypto market is a rise in scams and fraud. One of the most popular is phishing attacks, where users are duped into sharing their wallet or exchange account logins.
A Federal Trade Commission report from June 2022 uncovered that Americans lost more than $1 billion to cryptocurrency fraud. These cases have only continued to rise.
Crypto traders and investors can identify and avoid scams and fraud by being wary of suspicious messages and asking them to share login data. It is also prudent to verify the URL of any crypto site to ensure its authenticity and ensure you are not duped.
Security of Wallets
Crypto wallets are used to store your crypto assets in a way that is safe and easily accessible. Wallets also allow traders to send, receive, and spend cryptocurrencies.
Types of wallets
The three main types of crypto wallets are hardware, software, and paper.
Hardware wallets
Hardware wallets have private keys stored within a thumb drive device. Users can only access the crypto stored within the device when they connect it to the internet. Since the device stores the crypto offline, it seeks to balance security and convenience.
Software wallets
The other type of wallet is a software or online wallet. This one stores keys within an app or software. Using software wallets makes spending your crypto easier, as you would with a bank account. To guarantee the safety of these wallets, ensure you protect them with two-step verification.
Paper wallets
Paper wallets are keys written on a physical item, such as paper, before being stored safely. They are not ideal if you are looking to spend your crypto within a short time. However, as it stores the crypto offline, it guarantees top-notch security.
More than a crypto wallet is required to guarantee the safety of your assets. You should preserve your keys in a safe place where you will neither lose nor forget them. Moreover, beware of phishing campaigns that seek to steal your wallet credentials and assets.
Importance of Private Keys
Private keys play a vital role in the cryptocurrency industry. They authorize transactions while ensuring they cannot be altered once they go live. If the transaction details are changed, the signature becomes incorrect, as the algorithm will generate a key using identical information.
Users cannot access the wallet to spend, withdraw, and transfer Bitcoin without a private key. A private key ensures you control your Bitcoin holdings so you can pay whenever you want.
One of the main dangers with private keys is losing access to it. If you lose your private key, you cannot access the wallet to spend your coins. Therefore, private keys should be stored in a safe location.
Exchanges and Platforms
Cryptocurrency exchanges are vital to the Bitcoin ecosystem. Exchanges are like brokerage platforms that support the purchase and sale of cryptocurrencies.
However, as a Bitcoin user, choosing a reputable cryptocurrency exchange is the main challenge. Over the years, exchanges such as Mt. Gox and FTX have collapsed, leaving BTC holders counting losses.
Before investing in Bitcoin research the available exchanges before committing to one. Some factors to consider before settling on one include security, compliance with the local regulatory framework, and user-friendliness. Monitor the exchange’s proof-of-reserves to understand whether they are blending customer assets with their own.
After you settle on a cryptocurrency exchange, the next step is to create an account. This process involves submitting your name and email and completing a Know Your Factor (KYC) process.
Setting up two-factor authentication (2FA) on your account is advisable to minimize the chances of it being hacked. 2FA ensures that only you can access your account.
Legal and Regulatory Compliance
When making cryptocurrency investments, you should first assess the legal framework around these assets in your country. For instance, China has imposed a total ban on cryptocurrency trading.
Tax requirements on Bitcoin capital gains also differ depending on the country. For instance, El Salvador does not impose any capital gains tax on Bitcoin transactions. In contrast, India’s crypto capital gains tax is a whopping 30%. Aboding by the tax requirements will ensure you remain compliant.
It is paramount to note that cryptocurrency regulations are constantly evolving. In the US, the Securities and Exchange Commission (SEC) is under intense heat from some legislators seeking to create a clear regulatory framework.
SEC Chair @GaryGensler’s continued refusal to provide clarity for the digital asset ecosystem is shameful.
If “the law is clear” in support of his position, why does @SECgov keep losing in court? https://t.co/8Q8K1VFvq6
— Patrick McHenry (@PatrickMcHenry) December 15, 2023To adapt to the evolving legal landscape, a Bitcoin trader should always monitor the regulatory environment for changes.
User Education and Best Practices
New crypto users are urged to make an effort to learn more about Bitcoin and the cryptocurrency industry before making any form of investment. With systematic industry navigation guides, beginner users can readily access educational resources.
While Bitcoin seeks to create inclusion, ignorance is risky. Bitcoin is a volatile asset, with the price historically recording massive changes within a short period. Moreover, as a beginner, you must know the risks of failing to maintain your crypto wallet’s security.
Case Studies and Real-World Examples
Bitcoin has been crucial in promoting financial inclusion and transforming the digital landscape. El Salvador became the first country to adopt Bitcoin as legal tender in 2021.
The #BitcoinLaw has been approved by a supermajority in the Salvadoran Congress.
62 out of 84 votes!
History! #Btc🇸🇻
— Nayib Bukele (@nayibbukele) June 9, 2021Since then, the country has attracted multiple Bitcoin investments. The world’s first Bitcoin bonds will launch in El Salvador in early 2024.
Bitcoin is also gaining recognition from Wall Street giants. The world’s largest asset manager, BlackRock, and investment firms like Fidelity and Valkyrie have filed for spot Bitcoin ETFs.
Bitcoin has also been used in aid efforts. $41 million worth of Bitcoin was donated to Ukraine during the onset of its war with Russia.
These use cases show that Bitcoin has evolved from being a speculative asset. It is now finding its space as an asset class.
Conclusion
Bitcoin has played a crucial role in transforming the traditional financial landscape. However, at the same time, its growth has not been without challenges, with many users falling victim to scams, fraud, and hacks prevalent in the cryptocurrency industry.
Bitcoin is overcoming these challenges and solidifying its role as a digital currency. By gaining adoption as legal tender, Bitcoin has demonstrated that it can be used as an alternative to fiat currency.
One can best interact with Bitcoin if they fully understand it. With cybercriminals looking to steal crypto assets, users are urged to maintain vigilance. It is also paramount for beginners to explore educational resources that teach them more about the industry.
