Everything you need to know about cryptocurrency
‘Cryptocurrency’ has become an increasingly familiar term since the first emergence of Bitcoin in 2009.
Since then, numerous cryptocurrencies have been developed and the combined Bitcoin and crypto market value has continued to rocket – now valued globally at around £2 trillion.
With PayPal announcing that they will be supporting cryptocurrency payments, ‘crypto’ is becoming increasingly accessible to the public.
For children who’ve grown up in a digital world, the idea of a non-physical currency is probably something they’ve already got to grips with through playing online games. Many young people are turning to cryptocurrency as a way of making money and a US summer camp for children aged 5-17 even offers an introduction to crypto-trading.
So what actually is a cryptocurrency? What are the opportunities and risks? And what should parents be aware of if their child is interested in crypto mining or investment?
What are cryptocurrencies?
A cryptocurrency – or a ‘crypto’ – is a piece of data used as a medium of exchange. Each cryptocurrency – for example Bitcoin or Ethereum – is real currency, much like British pounds or US dollars.
It’s important to not confuse cryptocurrencies with in-game virtual currencies – such a Robux in the Roblox game. A virtual currency only allows you to purchase items within the game; you can buy a real house with cryptocurrency if the seller is willing.
Most cryptocurrencies have a finite amount of tokens (a token is a unit of cryptocurrency). This is what drives up the value of a cryptocurrency, as the more people invest in them the fewer there are.
Cryptocurrencies operate via ‘decentralised control’. This means that they aren’t regulated by a bank or government, as traditional currencies are.
The decentralised control in the context of cryptocurrency is called the ‘blockchain’, a series of ‘blocks’ of data that act as a record of all the transactions that have been made. All of these ‘blocks’ are interconnected, which is what gives it security. If you were to try and hack into one block, it would affect all the others. You can read more about blockchain technology here.
There are currently many different cryptocurrencies and they have relatively minor differences. For example, Ethereum processes transactions much faster than Bitcoin, whilst Cardano is more environmentally sustainable.
There have also been many ‘joke’ cryptocurrencies – most famously Dogecoin – which is still struggling to reach a value of $1 on account of having an effectively limitless supply.
Why is ‘crypto’ so popular?
Some people believe cryptocurrencies could replace regular currencies within 5 years time.
Those involved in crypto argue that they will ‘democratise’ currency by getting around the reliance on banks. On the surface, anyone with access to a computer (and a fair amount of hardware) can ‘mine’ for cryptocurrency, and with the current value of a single Bitcoin set at £34,000, anyone can become very wealthy.
Cryptocurrency transactions are usually processed in a matter of minutes, unlike bank transfers that might take days. The person involved and details of the transaction remain relatively anonymous.
What is ‘mining’ for cryptocurrency?
One of the main ways of getting tokens of cryptocurrency is called ‘mining’.
This involves having your computer perform an intensive series of mathematical problems needed to verify a ‘block’ in the blockchain, much like a card machine processes a transaction you might make with your regular debit card.
As your computer solves these problems, there is a chance that you will earn a token of a given cryptocurrency, although this likelihood is decreasing as more people take up crypto mining.
If that all sounds pretty complicated, that’s because it is. To mine a cryptocurrency, you need some pretty specialised hardware called an ‘asic’, or ‘application-specific integrated circuit’.
The more money you spend on this hardware, the more efficient your mining process will be and the more tokens of cryptocurrency you’re likely to make.
If you don’t want to mine, the most popular place to buy and sell cryptocurrencies is the site Coinbase. PayPal recently announced that UK users will now be able to trade in cryptocurrencies – although you’ll only be able to use them within the confines of the platform.
How old do you have to be to trade or mine for cryptocurrency?
There are technically no age-restrictions for trading or mining in cryptocurrencies – although established sites such as Coinbase and Paypal require users to be at least 18.
However, anyone of any age can mine for cryptocurrency.
There are also ways of purchasing tokens that don’t require you to be over 18. For example, the site Purse.io has an age restriction of 13+. Purse allows you to transfer the cost of an Amazon gift-card into tokens of cryptocurrency.
The risk of cryptocurrency scams
As with any form of currency – there are financial risks with crypto.
The values of even the most successful of cryptocurrencies – like Bitcoin – are volatile and crashes are not uncommon.
There have been stories of crypto trading addiction – but the greatest risk involved for young people lies within the increasing number of crypto scams on the market.
The most regular scam is when someone creates a seemingly valid new cryptocurrency and encourages people to invest in it. Once they’ve taken the money, the company will shut down and those initiating the scam will leave with the money. These are, essentially, a pyramid scheme. One example of this is the company Theodex, which reportedly scammed investors out of $2 billion.
Similar scams involve someone impersonating a celebrity or company online and encouraging people to invest in what seems to be the next big cryptocurrency, claiming that the value is due to rapidly increase. The more the value rises, the more people invest. However, those initiating the scam will withdraw their tokens at the peak, causing the currency’s value to drop dramatically and those who invested to lose out.
Because cryptocurrencies are unregulated, there is little protection for victims of scams. The FCA (Financial Conduct Authority) is in the process of regulating how cryptocurrencies are advertised.
If your child wants to start investing in cryptocurrency, there is also plenty of financial advice available on various social channels, but remind them to be wary of advice that doesn’t have firm backing. Just because someone has an extensive following, doesn’t mean that their advice is reliable.
You might not think of cryptocurrency as being a particularly damaging industry for the environment. However, to keep the blockchain running requires a huge amount of energy.
As tokens of cryptocurrency become more scarce and therefore more valuable, the more people are using high-powered hardware to mine and the more Co2 is produced.
Some cryptocurrencies use a different kind of blockchain that doesn’t have the same environmental cost as it doesn’t rely on the same perpetually increasing amount of energy from miners.
What should you do?
If your child is interested, discuss what appeals to them about cryptocurrency and make sure that they fully understand the risks involved.
Whilst cryptocurrencies might not be replacing regular currencies right away, they are definitely becoming increasingly popular and easy to trade in. The willingness of certain companies to move towards environmentally sustainable blockchains is also very promising.
Many young people are already showing an interest so it’s important to make sure they understand that cryptocurrency can be a risky business: for every fortune fairytale, there are also stories about financial ruin.
It’s important to discuss the process of investing in cryptocurrency with your child and to make sure that they’re able to identify when something might be a scam. If they feel like they may have made a mistake, encourage them to come to you.
Highlight that not all financial advice is reliable and that they should explore carefully where this advice is coming from. You might want to research together to find more trustworthy sources.
If they do get involved, it might be a good idea to stick with the more established cryptocurrencies as these are less likely to disappear overnight.
It’s also worth discussing the environmental costs with your child if they’re thinking of investing and encourage them to look into currencies like Cardano.