How to Teach Your Child About Cryptocurrency

Your child may have heard about cryptocurrency and Bitcoin, seen the flashy videos on TikTok, or discussed the subject with friends but still have not fully grasped their significance. Some may be well-versed in these terms and itching to buy electronics with crypto or even invest in digital currencies. Or, they may have zero interest in cryptocurrencies.

In any case, as part of good parenting, it’s your job to help your children understand the complexities of the financial world. With younger people now factoring cryptocurrency into their retirement investing plans, according to the 2022 Investopedia Financial Literacy Survey, understanding cryptocurrency may be extremely important for children.

Key Takeaways

• Given its high profile, cryptocurrency 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 ill-informed chatter and outright scams.
• It’s important to communicate to your kids that cryptocurrency can decline sharply in value, making it risky to own.

Why Crypto Literacy Matters

The early enthusiasm for cryptocurrency has been tempered lately by its extreme price volatility, not to mention the scams, hacks, and bugs that regularly rock this nascent industry.

Economists disagree on the longevity of cryptocurrency, but it’s likely to be around for years to come and some believe that it may overtake spending with cash and credit cards within five to 10 years.

Whatever your own view is of crypto, it may be generating a great deal of interest from your child. There’s no need to over-emphasize cryptocurrency but it should be a part of the basics of financial literacy that you pass on to your child.

The ABCs of Money

“Teaching about money [almost] starts at birth,” explains Joyce Serido, 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, they’re on their way to understanding crypto. It’s around the preteen years, she adds, that children may amp up their questions 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, losing, and working for money.

Raising a Wise Consumer

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.

Learning About Crypto Online

Let’s say your child is ready to jump into crypto. You can help your kid research the topic by checking out reputable sources which explain 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 you may want to look at that, too, as it can be a teaching opportunity to review its crypto videos together. The site features many videos, including 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 a range of sources, reputable and dubious, you are helping your child separate reliable information from potential cons and become a smarter consumer.

What Is Crypto?

Cryptocurrency is money that exists only in digital form, not in physical form. The records of its ownership and exchange are verified and maintained by a decentralized system that relies on cryptography to keep it secure.

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 March 24, 2024, there are more than 20,000 digital currencies with a combined market capitalization of $2.53 trillion, according to CoinMarketCap.

Perils of Cryptocurrency

The largest cryptocurrency by far is Bitcoin (BTCUSD), released in January 2009 by the pseudonymous Satoshi Nakamoto. As of March 12, 2023, a single Bitcoin was worth $21,240. It’s worth pointing out to your child that it was worth $64,400 per digital coin as recently as November 5, 2021.

Then there’s the FTX token, which launched in May 2019 for $1.20, soared to as much as $61 within days, and then crashed back to $1.08 on March 12, 2023. That, of course, was after the cryptocurrency exchange on which it was traded went bankrupt.

Safeguarding Cryptocurrency

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 a distributed ledger enforced by a vast network of computers. No central authority issues cryptocurrencies, which renders them theoretically immune to government interference or manipulation. 

While some crypto investing platforms require the trader to be at least 18 years old, others have no age limit. Even with an age requirement, any adult can invest in cryptocurrency on behalf of a child.

Here’s What Else to Tell Your Child About Crypto: 6 Tips

1. Spending crypto. Cryptocurrency is like fiat or traditional currency in that you can use it to buy items and services. It’s different because it exists only in digital form. One of the easiest ways to spend cryptocurrency at retailers and vendors is through gift cards purchased through platforms like Bitrefill. It would be difficult or impossible to use a crypto coin to buy a pizza on Main Street, but many large retailers are jumping aboard the crypto wagon. Among them are Starbucks Corporation (BUX), Burger King, and Yum! Brands, Inc. (YUM, parent of KFC, Taco Bell, and Pizza Hut).
2. Trading crypto. 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.
3. Accessing crypto. Crypto funds are always available anyplace in the world because they aren’t tied to a bank or a government. (Of course, that’s assuming that the platform is a going concern, unlike FTX.)
4. Crypto security. Cryptocurrency can be safer to use because you don’t need to provide personal information to a vendor, reducing the risk of identity theft or fraud.
5. Crypto volatility. Cryptocurrency values have wild ups and downs, 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.
6. Crypto is not a game. Some games like Roblox and Fortnite use virtual currencies called Robux and V-Bucks, respectively. These are fictional currencies 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 verification system that is the heart of any cryptocurrency. A blockchain is a distributed database that is shared among the nodes of many computers, providing unalterable proof of a crypto coin’s existence and a history of its use.

The blockchain maintains a secure and decentralized record of transactions. It guarantees the fidelity and security of a record of data.

One key difference between a traditional database and a blockchain is how the data is structured. A blockchain collects information in groups, known as blocks, each of which holds a set 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 it is filled.

A database usually structures its data into tables. A blockchain, as its name implies, structures data into chunks (blocks) that are strung together.

This data structure creates an irreversible timeline of data. When a block is filled, it is set in stone and becomes a part of the timeline. 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 remains a mystery.

Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms, 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. As with any cryptocurrency, there are no physical bitcoins, only balances kept on a public ledger that anyone can view but no one can alter.

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 bank or government, 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 Does Crypto Mining Work?

Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms each new transaction.

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 because miners receive rewards for their work with crypto tokens. Technology-inclined entrepreneurial types see mining as pennies from heaven, like the California gold prospectors in 1849.

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.

Underlying distributed ledgers is the same technology that is used by blockchain, which is the technology that is used by bitcoin. Blockchain is a type of distributed ledger used by bitcoin.

What Is a Digital Wallet?

A digital wallet (or e-wallet) is a personal storage space for cryptocurrency users. Like the currency itself, it exists only in the form of software.

The digital wallet stores users’ payment information and passwords for their payment methods and related websites. By using a digital wallet, users can trade crypto or make purchases using it.

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 is 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.

Read the original article on Investopedia.