It’s not uncommon to hear about frauds, hacks, and scams involving crypto. The latest twist involves AI-generated deepfakes attempting to scam people out of their Bitcoin (CRYPTO: BTC). So it’s perhaps no surprise that security is top of mind for many crypto investors these days.
In the 2024 Cryptocurrency Investor Trends and Preferences Survey conducted by The Ascent (a division of The Motley Fool), among respondents who hadn’t put money into crypto, the most-cited reason, at 35%, was security concerns. In addition, 28% pointed to the lack of a clear regulatory framework, and 24% said “crypto is a scam.” All of those concerns speak to the broader question of these assets’ safety as investments. (People could select multiple responses.)
With that in mind, here’s a closer look at three types of cryptocurrencies to avoid if security is your priority.
Meme coins
Although there are some perfectly legitimate meme coins with billion-dollar valuations — such as Dogecoin (CRYPTO: DOGE) and Shiba Inu (CRYPTO: SHIB) — the large majority of meme coins are simply not safe for most investors. Often, they are created within a span of a few hours in order to take advantage of some new fad or trend, and are very much at risk from scammers and fraudsters. You can literally find tutorials on YouTube on how to create a meme coin in just an hour.
As a result, meme coins lack the types of security that underlie more established currencies. Ethereum (CRYPTO: ETH), for example, has teams of cryptographers and developers working on its encryption protocols, including some that would (theoretically) be impervious even to attacks from powerful quantum computers.
But the primary risk for those who buy meme coins does not come from hackers. Instead, it comes from the creators of the coins themselves. Common ploys to separate people from their money include pump-and-dump schemes (many of which are executed via social media) and “rug pulls,” in which the founders of the coin disappear with buyers’ money overnight.
Low market cap coins trading for less than $1
There are more than 20,000 different cryptocurrencies, but only 468 have market caps over $100 million, according to CoinMarketCap. In the largest tier, there are 95 coins with market caps above $1 billion, and 16 with market caps above $10 billion.
Just be aware, however, that the creators of many coins attempt to bring their cryptos to a respectable market cap very quickly by issuing billions or even trillions of coins at their launch. Thus, even though the coin might be trading well below $1 (and sometimes, below $0.01), its market cap might be $100 million or higher, thanks to a huge initial coin supply.
Putting all this together, it’s possible to come up with two basic rules to improve the security of a crypto holding: First, only invest in coins that exceed a threshold market cap, and second, only invest in coins that are priced above $1. Of course, the choice of that threshold market cap will be up to the individual, but my rule of thumb is to focus only on coins that are listed within the Top 100 by CoinMarketCap. Right now, that would require a minimum market cap of about $1 billion.
Not that there’s anything wrong with some low-market-cap coins. At one point in time, Bitcoin was a low-market-cap coin. After Bitcoin launched in 2009, it took two full years for it to rise above the $1 mark. At that time, the circulating coin supply of Bitcoin was about 5 million, so the implied market cap for Bitcoin was just $5 million.
Coins not trading on major cryptocurrency exchanges
As a final rule of thumb, avoid investing in cryptos that are not listed on major cryptocurrency exchanges such as Coinbase Global (NASDAQ: COIN). This should give you a good idea of whether a crypto is credible. Since Coinbase Global and its peers must do their own due diligence before deciding to list a crypto for trading, let them do the heavy lifting for you.
However, this rule is not completely set in stone. Sometimes, the Securities and Exchange Commission reveals that it’s considering taking regulatory actions against a certain cryptocurrency. Out of an abundance of caution, exchanges or other trading platforms might decide to delist that crypto until the matter is resolved.
And what about Bitcoin?
Obviously, Bitcoin meets all three of the criteria above for a “safe” crypto investment. It’s not a meme coin. It has a massive market cap of more than $1 trillion. And it is available for trading just about everywhere. There are even new spot Bitcoin exchange-traded funds, so you can invest in it in the same way you’d buy a stock, without dealing with a cryptocurrency exchange.
But is Bitcoin “safe”? The crypto’s enthusiasts like to point out that Bitcoin itself has never been hacked. So, in that regard, it is “safe.” But there have been plenty of Bitcoin scams, frauds, and heists over the years.
So you definitely need to keep your eyes and ears open when dealing with crypto. Whatever you do, if someone is offering to “double your Bitcoin,” you need to run in the opposite direction.
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Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, and Ethereum. The Motley Fool has a disclosure policy.
3 Types of Cryptocurrencies to Avoid If Security Is Your Priority was originally published by The Motley Fool