3 types of cryptocurrencies to avoid if security is your priority

It is not uncommon to hear about frauds, hacks and scams involving crypto. The latest twist involves AI-generated deep fakes trying to cheat 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 not putting 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 these concerns speak to the broader issue of these assets’ safety as investments. (People can choose multiple answers.)

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 – like Dogecoin (CRYPTO: DOGE) and Shiba Inu (CRYPTO: SHIB) — the vast majority of meme coins are simply not safe for most investors. Often they are created in a matter of hours to take advantage of a new fad or trend, and are a big 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 type of security that underlies more established currencies. Ethereum (CRYPTO: ETH)for example, has teams of cryptographers and developers working on its encryption protocols, including some that would be (theoretically) 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 carried out via social media) and “back pulls”, in which the founders of the coin disappear overnight with buyers’ money.

Story continues

Low market cap coins trade for less than $1

There are more than 20,000 different cryptocurrencies, but only 468 have market capitalizations of more than $100 million, according to CoinMarketCap. In the largest tier, there are 95 coins with market capitalization above $1 billion, and 16 with market capitalization above $10 billion.

However, just be aware 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 launch. So, while the coin may be trading well below $1 (and sometimes below $0.01), its market cap could be $100 million or higher, thanks to a large initial coin supply.

To put it all together, it is possible to come up with two basic rules to improve the security of a crypto holder: First, invest only in coins that exceed a threshold market cap, and second, invest only in coins 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 only focus on coins listed in the Top 100 by CoinMarketCap. At the moment, it would require a minimum market capitalization of around $1 billion.

Not that there is anything wrong with some low market cap coins. At one time, Bitcoin was a coin with a low market cap. After Bitcoin was launched in 2009, it took two full years before it rose above the $1 mark. At that time, the circulating coin supply of Bitcoin was around 5 million, so the implied market cap for Bitcoin was just $5 million.

Coins are not traded on major cryptocurrency exchanges

As a final rule, avoid investing in cryptos that are not listed on major cryptocurrency exchanges like Coinbase Global (NASDAQ:COIN). This should give you a good idea if a crypto is credible. Since Coinbase Global and its peers have to 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. Occasionally, the Securities and Exchange Commission reveals that it is considering taking regulatory action against a certain cryptocurrency. Out of an abundance of caution, exchanges or other trading platforms may decide to delist that crypto until the matter is resolved.

And what about Bitcoin?

Clearly, Bitcoin meets all three of the criteria above for a “safe” crypto investment. This is not a meme coin. It has a massive market cap of over $1 trillion. And it’s available for trading just about anywhere. There are even new mock Bitcoin exchange-traded funds, so you can invest in them the same way you would buy a stock, without dealing with a cryptocurrency exchange.

But is Bitcoin “safe”? The crypto enthusiasts like to point out that Bitcoin itself has never been hacked. So, in that sense, it is “safe.” But there have been many Bitcoin scams, frauds and robberies over the years.

So you should definitely keep your eyes and ears open when dealing with crypto. Whatever you do, if someone offers to double your Bitcoin, run in the opposite direction.

Should you invest $1,000 in Bitcoin right now?

Before you buy shares in Bitcoin, consider:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy right now… and Bitcoin wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $545,088!*

Stock Advisor offers investors an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks every month. The Stock advisor have service more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock advisor returns from 4 April 2024

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