Teaching your kids about cryptocurrencies is really important, especially if your kids are in secondary school. Your kids are probably hearing about them from their friends or social media. Whilst you might feel that it doesn’t matter as they can’t buy or sell any, their early impressions can be powerful and hard to change as they get older.
In this blog, I’ll go through how you can teach your kids:
What is cryptocurrency?
Why do some people like cryptocurrency?
Why do some people not like cryptocurrency?
Is cryptocurrency money or an investment?
For this particular blog, I have tried to be as objective as possible. If you want to know my personal views, you can read my blog, ‘How to teach your kids about the Greater Fool Theory’.
Whilst not essential, I do recommend that before you talk to your kids about cryptocurrency, you talk to them about regular "fiat" currencies.
What is Cryptocurrency? The basics
Used to buy and sell things: Cryptocurrency is a form of money that, in theory, can be used to buy and sell things such as cars or pizza like regular money. However, only a few places actually accept cryptocurrencies as payment at the moment.
Not physical money: Unlike other types of money, with Cryptocurrency there are no coins or banknotes, despite having names like Bitcoin. Cryptocurrency is digital money on the internet.
Not linked to a country: The cryptocurrency isn’t linked to a particular country. When you transfer cryptocurrency, it goes directly from one person's digital wallet to the other person's digital wallet on the internet no matter where they are in the world. The money doesn’t go through a bank. Each time cryptocurrency is moved from one person to another, there is a note (record) kept on a big digital note book called the ‘Blockchain’.
Getting cryptocurrency: You can exchange money in one currency to get cryptocurrency, just like you would exchange your money for money in another country. You transfer money from your online bank account to a digital exchange and they give you cryptocurrency in your digital wallet.
Created by computers: Cryptocurrencies were, and are still being, created by people using very complex mathematical equations on computers. The people that then solve these equations get some cryptocurrency which they can then sell on. The process of solving/finding is called 'mining'. It’s like the miners in the old days who dug for gold and then sold it on to buyers.
Different types of cryptocurrencies
There are lots of different types of cryptocurrencies that your kids might hear about. The most popular is Bitcoin which has been around since 2009.
The other popular ones are Ethereum, Litecoin and Dogecoin (this one is well known with kids as it uses the Dog Meme picture).
These use different computer programs (or Blockchains) to record the transactions. Some cryptocurrencies are deemed more secure than others. Some have a limited amount of digital coins that can be mined/found, others are unlimited. For example, Bitcoin is limited to 21 Million Bitcoins whereas Dogecoin is unlimited. This impacts on the value of these currencies (if the amount is limited, people will pay more to have them, all else being equal).
The value of these different cryptocurrencies changes over time based on how secure they are deemed to be, how many of them there are (or could be) but is mostly driven by popularity/demand.
Why do some people like cryptocurrency?
Viewed as safe: There is no bank holding your cryptocurrency. As it’s all digital and stored on millions of computers around the world, cryptocurrency is viewed by some as safe, or more appropriate, 'hidden' (the word ‘crypt’ is used for a vault that isn't hidden away, usually under a church). This was one of the reasons cryptocurrency was created, they didn’t like that countries and banks had control of people's money.
Cheaper to move: As the money is all digital, it can be cheaper to move money around the world. Therefore people who travel a lot for work with people overseas like it as it can save them money.
Developing countries: in some developing countries, the value of their own money changes all the time. They feel they’d rather hold other types of money and so cryptocurrency is viewed as an easy option.
Potential to become rich: The last one is that people holding cryptocurrency have potential to make themselves rich. This is called ‘speculation’ which I’ll come on to in more detail below.
Why do some people not like cryptocurrency?
Used by criminals: cryptocurrency is being used by criminals to move their money around the world without being tracked by the government or police in a particular country. One way police catch criminals is to look at where their money is. As this money is locked away on millions of computers around the world, it’s very hard to see who has which cryptocurrency and is therefore harder to catch these criminals.
Limited places to use it: There aren’t that many places you can actually use cryptocurrencies to buy and sell things. Therefore, it is not very useful as a currency. Although that might change in the future.
Potential to become poor: The price of cryptocurrencies changes very quickly so people have lost a lot of money at times. This is especially true when countries around the world make it harder for people to buy and sell them - for example, China and India are restricting or regulating the ability of their people to exchange their countries money for cryptocurrency. As the value of cryptocurrency is based purely on what people believe it to be worth, one day it could be completely worthless if views change in the future. This is akin to ‘Tulip Mania’ between 1634 and 1637, where people started paying large amounts for Tulips as everyone was talking about them and buying them. Then there was realisation that they were paying so much for a tulip, they panicked and the value of a tulip fell very quickly and people lost a lot of money.
Bad for the planet: As mentioned above, to get more cryptocurrency, computers have to solve very complex mathematical equations. These equations get harder and harder over time so the number of computers needed to solve them increases and this uses a lot of power which isn’t good for the environment.
Can be lost or stolen: It is possible for cryptocurrencies to get lost or stolen. This happens when the computer or digital wallet is taken, lost or hacked by someone. In 2013 one person had 7,500 Bitcoins stored only on his computer which he then accidentally threw away without realising. That computer is now worth around $375m.
Is cryptocurrency money or an investment?
Whilst cryptocurrencies are deemed to be a currency (money), very few people are using them to buy and sell things like you would with regular currencies. At the moment, very few shops accept cryptocurrencies as a form of payment. This might change in the future.
Most people are buying them as an ‘investment’. They feel they can make money from holding them as they believe the value will go up. I’ve put ‘investment’ in quotations as it can be argued that holding them is not an investment as they are speculating to make money quickly (just like gambling).
For those that have bought these cryptocurrencies and held them, they have made a lot of money (or have the potential to make a lot of money depending on when they sell them). As stories about these currencies are becoming more popular and used in more places, this increases the number of people who want to buy them. This drives up their perceived value and therefore it costs more to get them.
Other times people have lost a lot of money using cryptocurrency. Between December 2017 and December 2018, Bitcoin lost 84% of its value. During this time, lots of people got worried about the future of Bitcoin and sold their holdings and lost a lot of money.
As mentioned, I won’t express my personal view here. You’ll have to read ‘How to teach your kids about the Greater Fool Theory’ to see my views.
Summary
Whilst you might think that there is little point telling kids about cryptocurrencies, as they can’t buy or sell it now, they are likely to hear about it from others. Therefore, it’s really important that you get in there early to give them the full picture about what it is and how and why people are using it.
A majority of stories your kids will hear about cryptocurrency will be positive (I.e. how people have made a lot of money). This is because those that hold them need more people in the future to want to buy them as this makes them richer (to sell to a greater fool as the theory goes). We need to make sure our kids have a full understanding and are able to make informed, not emotionally driven, decisions about money when they grow up.
Thanks for reading!
Will
P.S. If you enjoyed this blog, it would be amazing if you could show your appreciation and support by ordering a copy of Grandpa's Fortune Fables.
