Children are curious about money, and it's good to channel this curiosity to teach them about finances and nurture money confidence.
These days, teens are hearing about cryptocurrency and they may start asking you about it—if they haven't already. The thing is, even a deep dive into the origins and definition of cryptocurrency can lead you down a research rabbit hole while leaving many of us still uncertain of how to relay the information to our kids.
We put together this cheat sheet in hopes it will help those of you still working to understand cryptocurrency basics.
So, what is cryptocurrency?
Like most industries, the financial world has been moving to more digital environments over the past several decades. Today, most transactions are made by tapping payment cards, using online portals and mobile apps. It's becoming novel to see someone paying with cash. Taking this to the next level is the use of digital currencies - which is precisely what cryptocurrency is.
But, you might wonder, isn't paying for things with cards, devices, and online transactions essentially digital money? Not really. You see, those transactions are still backed by centralized currency (like dollars), handled by third parties, and regulated by governments. Cryptocurrency, however, is none of those things.
Cryptocurrency transactions are peer-to-peer, meaning there's no central authority managing the currency. Users of the cryptocurrency are each considered owners and contributors to the network. Since cryptocurrency exists on its own digital network, it is disconnected from the government-regulated currencies we know, like dollars and pounds. As a result, digital currencies are not regulated by governments or banks.
How does cryptocurrency work without regulation?
Cryptocurrencies are created and supported by a technology called blockchain, which is a secure, decentralized digital record of how many units of the currency exist, who owns them, and all cryptocurrency transactions.
This record is often referred to as a “general ledger," which has been said to be un-hackable as it is constantly verified, and public. Cryptocurrency supporters assert that this transparency, public visibility, and constant verification make cryptocurrency a self-regulating system.
How is cryptocurrency created?
Most cryptocurrencies are created by a process called mining, which involves complicated computing to solve a complex math problem. The miner who solves the problem is awarded a unit of currency and the blockchain ledger is updated, recording to record the newly added currency.
The process of mining requires sophisticated hardware and can be very costly. While there are individuals who mine crypto, it is mostly mined by companies or large groups of individuals working together.
Is cryptocurrency safe?
Advocates of the blockchain view it as an incredibly secure, proven technology that is constantly being checked and verified by a large number of computer scientists around the globe. The transparency of the ledger reduces the likelihood of fraud, as does the fact that crypto transactions can't be reversed. Also, because owners use pseudonyms, there's not a lot of personal information floating around that can fall into the wrong hands.
But while the system itself is secure, that doesn't mean there aren't cryptocurrency scams out there. There are scammers out there offering to sell phony crypto or solicit money for bogus investments. This is why most experts recommend investing in well-known cryptocurrencies and also doing your due diligence before you decide to invest.
How many types of cryptocurrency are there?
Bitcoin is probably the most well-known cryptocurrency. According to CoinMarketCap.com, however, there are more than 18,000 cryptocurrencies in existence today, of varying value. In addition to Bitcoin (BTC), Ethereum (ETH) is probably the next most recognizable currency, followed by Tether (USDT), Binance Coin (BNB), and Solana (SOL).
What's a crypto wallet?
As the name suggests, a cryptocurrency wallet is where owners store their digital assets. You don't have to have a crypto wallet in order to own or use cryptocurrency, however, most owners use wallets to organize, use, and secure their crypto.
There are several different kinds of cryptocurrency wallets. The most common type is a custodial wallet, where you can store your crypto in a wallet created by a third party, such as a broker. Custodial wallets are convenient to use and give owners easy access to their cryptocurrency. They are typically free. However, the third party controls the wallet, the currency, and the level of security provided.
It has been suggested that the most secure wallet option is called a cold wallet, which is using an external device to store currency offline, much like an external hard drive. Cold wallets give you total control of your currency. However, it can make using, buying, and trading your currency more difficult. The hardware required for storing crypto can also be pricey.
A hot wallet is usually an app used to store cryptocurrency online. Unlike custodial wallets, hot wallets are not developed or managed by a third party. Like custodial wallets, they make using cryptocurrency easy and are usually free. However, with a hot wallet, your digital assets are online and may be vulnerable to hackers.
A physical wallet also called a paper wallet, is a hard-copy printout of the "keys" and QR codes needed to make cryptocurrency transactions. Like cold wallets, a physical wallet keeps crypto offline and safe from hackers. Physical wallets are also free, however, they take some skill to create and make it harder for you to use your cryptocurrency.
Most cryptocurrency experts recommend owners use a combination of wallets. For example, storing most digital assets offline in a cold wallet while keeping small amounts easily accessible in either a custodial or hot wallet.
Also, all custodial, hot, and cold wallets have what's called a recovery phrase, which is a string of words that enables you to recover your cryptocurrency if you lose your wallet or access to your wallet. Like all passwords, it's critical to keep your recovery phrases safe and secure. Never share them with anyone.
Is cryptocurrency a good investment?
All investments come with risk, and how much risk you can or are willing to take determines whether a specific investment is right for you and your family. While some people have made money investing in cryptocurrency, others haven't fared as well. Because cryptocurrency is still relatively new, some consider it riskier than more established investment options - while others see it as a true opportunity.
If, after determining your goals and risk tolerance, you decide you want to invest in cryptocurrency, most experts recommend buying more established cryptocurrencies like Bitcoin or Ethereum, and doing so through a reputable, established crypto exchange company. This will minimize risks of falling in with a scam site and offer extra levels of security. Keep in mind there are usually transaction fees for these services. As with all investments, research is an important first step for getting started.
And remember, if you do make money investing in cryptocurrency, your earnings are taxable just like any other investment.
The bottom line
In many ways, cryptocurrency is still in its infancy, which means there are currently more questions than definitive answers. Some predict cryptocurrency as the future of money, while others consider it a fad or trend.
Perhaps one indication of the staying power of cryptocurrency is the fact that more and more major institutions and retailers, including Home Depot, Starbucks, Whole Foods, and Tesla, are currently accepting cryptocurrency, and more are likely to follow.