Your child may have heard the terms cryptocurrency or Bitcoin, seen the flashy videos about cryptocurrency on TikTok, or discussed the subject with friends but still doesn't fully grasp their significance. Or they may be well-versed in these terms and itching to buy electronics or toys with crypto, or to invest in digital currencies. Or they may have zero interest in cryptocurrencies.
No matter the situation, as part of good parenting, it's your job to help your children understand the complexities of the financial world. With younger generations factoring cryptocurrency into their retirement plans (according to the 2022 Investopedia Financial Literacy Survey), understanding cryptocurrency may be extremely important for children. And although some economists may disagree on the longevity of cryptocurrency, it's likely to be around for years to come, and some experts believe that it may overtake spending with cash and credit cards within five to 10 years. Crypto may be generating a lot of interest from your child.
- It's your job to help your children understand the complexities of the financial world, and cryptocurrencies may be generating a lot of interest from your kids.
- You can help your child research the topic by checking out both reputable and untrustworthy sources, focusing on how to separate reliable information from potential cons.
- It's important to communicate to your kids that cryptocurrency can decline in value, making it risky to own.
"Teaching about money [almost] starts at birth," explains Joyce Serido, associate professor and extension specialist of family social science at the University of Minnesota, who specializes in financial parenting. If children have received a solid foundation on how money and currency translate into value and buying power, then they're on their way to understanding crypto. It's around the preteen years, she adds, that children may amp up their requests about crypto and feel that they are ready to use it.
The resident crypto expert at the University of Minnesota's Carlson School of Management, accounting professor Vivian Fang, notes that she's years off from teaching her five-year-old son about crypto. Until then, she's schooling him in the value of money through lessons in earning and losing and working for money.
In addition to a weekly allowance of $5, Fang pays her son in quarters for completed tasks, such as one quarter for helping with the dishes and two quarters for assisting in dog walking. He can also incur losses in the form of a fine issued by his parents, if, for example, he misbehaves at a swimming lesson. Fang has witnessed what a discerning shopper her son has become. Working from the idea of using his own money, her youngster will either make a purchase or walk away after deciding an item is "too expensive." In a few years, he'll probably also take on a keen interest in crypto, as are millions of older kids now.
Let's say your child is ready to jump into crypto. You can help your kid research the topic by checking out reputable sources, such as Investopedia, which explains in clear terms what cryptocurrency is and the potential risks and benefits. Also, review together social media sites, like YouTube, which is filled with tutorial videos.
Many kids are drawn to TikTok, so don't leave that out, because it can be a teaching opportunity to review its crypto videos together. The site features many videos, with some from disreputable influencers who make wild get-rich-quick claims, punctuated with images of Ferraris and Rolls-Royces parked in front of sleek homes. By looking into various types of information, you are helping your child separate reliable information from potential cons and become a smarter consumer.
What Is Crypto?
A cryptocurrency is a decentralized digital currency that relies on cryptography for security. Help your child understand that crypto can be used like fiat, traditional currencies, such as U.S. dollars and Mexican pesos, as investments, and to pay for everyday goods and experiences. As of April 12, 2022, there are more than 18,847 digital currencies with a combined market capitalization of $1.95 trillion, according to CoinMarketCap. The largest by far is Bitcoin (BTCUSD), released in January 2009 by the likely pseudonymous Satoshi Nakamoto and as of April 12, 2022, worth more than $40,000 per digital coin.
The early digital products were easy to replicate, which was an inherent challenge to digital currencies until Bitcoin was introduced with safety measures in place. Now the use of cryptography and blockchain technology ensures that cryptocurrencies are nearly impossible to counterfeit or double-spend, despite being digital.
Blockchain is basically a distributed ledger enforced by a varied network of computers. No central authority issues cryptocurrencies, which renders them theoretically immune to government interference or manipulation. While some crypto investing requires the trader to be at least 18 years old, others have no age limit. Even with an age requirement, you can also invest for your underage children until they turn 18.
Here's What Else to Tell Your Child About Crypto: 6 Tips
- Growing popularity. Cryptocurrency is like fiat or traditional currency because you can use it to buy items and services; it's different, though, because it's digital only. One of the easiest ways to spend cryptocurrency at retailers and vendors is through gift cards purchased through platforms like Bitrefill. Among those retailers that accept crypto are Starbucks Corporation (SBUX), Live Nation Entertainment, Inc.'s (LYV) Ticketmaster.com, Best Buy Co., Inc. (BBY), Target Corporation (TGT), Burger King, and Yum! Brands, Inc. (YUM, parent of KFC, Taco Bell, and Pizza Hut).
- Setup. You must create a crypto account where your funds are stored. You can do that through Coinbase, which is a cryptocurrency exchange that offers many currencies and payment methods. You buy crypto with traditional currency using debit cards or bank accounts.
- Accessibility. Crypto funds are always available any place in the world because they aren't tied to a bank or a government.
- Security. Cryptocurrency can be safer to use because you don't need to provide personal information to a vendor, lessening the chances of identity theft or fraud.
- Ups and downs. Cryptocurrency is volatile, which can be good or bad. Let's say you have $100 in your crypto account. The value can increase, meaning you have more in your account. However, if it dips in value—to $25, for example—there's nothing you can do to recover the lost funds but wait it out, hoping that the value will increase. It may not.
- Not a video game. While the games Roblox and Fortnite use virtual currencies called Robux and V-Bucks, respectively, they are fantasies that hold no monetary value in the real world. When playing, you can lose Robux, but you do not lose real money. Investments in actual cryptocurrency, on the other hand, can generate real and often big losses.
What is a blockchain?
A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
One key difference between a typical database and a blockchain is how the data is structured. A blockchain collects information together in groups, known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled.
A database usually structures its data into tables, whereas a blockchain, like its name implies, structures its data into chunks (blocks) that are strung together. This data structure inherently makes an irreversible time line of data when implemented in a decentralized nature. When a block is filled, it is set in stone and becomes a part of this time line. Each block in the chain is given an exact time stamp when it is added to the chain.
What is Bitcoin?
Bitcoin is a decentralized digital currency created in January 2009. It follows the ideas set out in a white paper by the mysterious and pseudonymous Satoshi Nakamoto. The identity of the person or persons who created the technology is still a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms do, and unlike government-issued currencies, it is operated by a decentralized authority.
Bitcoin is known as a type of cryptocurrency because it uses cryptography to keep it secure. There are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to (although each record is encrypted). All Bitcoin transactions are verified by a massive amount of computing power via a process known as "mining." Bitcoin is not issued or backed by any banks or governments, nor is an individual bitcoin valuable as a commodity. Despite it not being legal tender in most parts of the world, Bitcoin is very popular and has triggered the launch of hundreds of other cryptocurrencies, collectively referred to as altcoins.
How Do Bitcoin and crypto mining work?
Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms new transactions and is a critical component of the blockchain ledger's maintenance and development. "Mining" is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again.
Cryptocurrency mining is painstaking, costly, and only sporadically rewarding. Nonetheless, mining has a magnetic appeal for many investors who are interested in cryptocurrency because of the fact that miners receive rewards for their work with crypto tokens. This may be because entrepreneurial types see mining as pennies from heaven, like California gold prospectors in 1849. And if you are technologically inclined, why not do it?
What is a distribued ledger?
A distributed ledger is a database that is consensually shared and synchronized across multiple sites, institutions, or geographies, accessible by multiple people. It allows transactions to have public "witnesses." The participant at each node of the network can access the recordings shared across that network and can own an identical copy of it. Any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes.
A distributed ledger stands in contrast to a centralized ledger, which is the type of ledger that most companies use. A centralized ledger is more prone to cyber-attacks and fraud, as it has a single point of failure.
What is a digital wallet?
A digital wallet (or e-wallet) is a software-based system that securely stores users' payment information and passwords for numerous payment methods and websites. By using a digital wallet, users can complete purchases easily and quickly with near-field communications technology. They can also create stronger passwords without worrying about whether they will be able to remember them later.
Digital wallets can be used in conjunction with mobile payment systems, which allow customers to pay for purchases with their smartphones. A digital wallet can also be used to store loyalty card information and digital coupons.
The Bottom Line
Given the likelihood that cryptocurrency will have a continued and, perhaps, a growing impact on the world economy, it may be an important element to consider when it comes to your children's financial education. In addition to helping your kids track down reputable information, it's important to be upfront with them about the risky nature of cryptocurrency investing.