Investors are discussing Bitcoin’s meteoric rise. Technology enthusiasts are fascinated by the potential of blockchain technology. And people everywhere are asking questions about this new “digital money.”
Cryptocurrency is becoming much more popular, with a 2021 study indicating that approximately 13% of Americans traded crypto in the preceding 12 months.
Despite its growing popularity, there’s still a lot of confusion about cryptocurrency in general, as well as specific coins like Bitcoin and Ethereum.
This guide will help crypto newcomers understand the basics. Specifically, it will discuss aspects that parents need to know about crypto.
From investing in crypto for your children’s future to answering crypto questions that your kids may have, this comprehensive intro to cryptocurrency will tell you everything you need to know.
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What Is Cryptocurrency?
Cryptocurrency is a type of virtual currency, also called digital currency.
The most popular cryptocurrencies include Bitcoin (BTC) and Ethereum (ETH), but there are over 13,000 active cryptocurrencies traded today.
Individual cryptocurrencies may be referred to by their actual names (Bitcoin, Ethereum, or Solana, for instance) or as coins or tokens.
Cryptocurrencies trade on the open market, generally through private businesses known as exchanges.
Individuals can trade tokens with other people, with exchanges acting as middlemen. The end result is somewhat similar to how stocks are traded (although the regulations are different).
Crypto can be bought and sold using dollars if you’re purchasing through an exchange. It can also be exchanged for other tokens — meaning you can use Bitcoin to buy Ethereum, and vice versa.
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Currency, or asset?
Although it’s called “cryptocurrency,” most crypto tokens haven’t reached widespread adoption as actual currencies. What this means is that you’re unlikely to be able to buy a coffee or pay your rent in Bitcoin — at least not yet.
Today, crypto is widely thought of as a digital asset class rather than a true currency. Most people who own crypto own it for investment purposes rather than to be used for day-to-day transactions.
This is starting to change. El Salvador recently became the first country to adopt Bitcoin as legal tender, and a handful of major companies in the U.S. now accept Bitcoin.
Decentralized networks
The majority of cryptocurrencies are decentralized networks that run on blockchain technology (more on blockchain below).
Decentralized means that there’s no central authority or government managing the currency.
Traditional currencies (otherwise known as fiat currencies) such as the U.S. dollar are centralized. This means that the U.S. government is responsible for creating, distributing, and ultimately regulating the currency.
Because most cryptocurrencies have no central authority, they are essentially regulated by the users and owners of the currency.
If there’s no central authority, what prevents users from counterfeiting cryptocurrency?
The answer lies in the art of cryptography, an advanced technology that secures digital cryptocurrency transactions over what’s called the blockchain.
The blockchain explained
The blockchain is essentially a ledger, or set of records. It is a technology that allows for detailed records to be kept in a distributed network of individual computer nodes spread throughout the world.
The blockchain is decentralized, meaning that there’s no central ledger.
Instead, thousands of market participants each create their own records. Each record is then compared with every other record, as each record is made public.
This redundancy helps to prevent fraudulent cryptocurrency transactions, accidental double transactions, and spam. It’s the backbone of the blockchain — at least as far as Bitcoin and other coins are concerned.
For example, every time a Bitcoin transaction takes place, the transaction data is added to “blocks” on the blockchain. Each record keeper updates their own ledgers, which are publicly available and compared with each other automatically.
This is the basic concept, but blockchain is a complex technology. It holds the potential to change many aspects of our lives, from how we conduct transactions to how we prove ownership of assets.
Top 10 cryptocurrencies by market cap
There are over 13,000 cryptocurrencies in existence.
And collectively, they are worth a lot. The total value of all cryptocurrencies is well into the trillions.
At the moment, the entire crypto market is worth over $2.5 trillion, although this can change dramatically from day to day.
For context, $2.5 trillion is about as much as the most valuable company in the world: Microsoft (Apple is worth a similar amount).
For beginners, it’s useful to think about the top handful of cryptocurrencies. The list below describes the top ten cryptocurrencies, arranged by market capitalization, aka market cap.
The market cap is the total value of all that specific crypto in existence based on the current price that the coin trades at on the open market.
The top ten cryptocurrencies make up around 80% of the total market cap of the entire crypto market. The remaining ~13,000 or so make up the other 20% of the market’s value.
- Bitcoin (BTC)
- Ethereum (ETH)
- Binance Coin (BNB)
- Tether (USDT)
- Solana (SOL)
- Cardano (ADA)
- XRP (XRP)
- Polkadot (DOT)
- USD Coin (USDC)
- Dogecoin (DOGE)
Note that the crypto market can change fast. While it’s likely that BTC and ETH will stay no. 1 and 2 for the foreseeable future, the rest of the top ten is more subject to change.
This top ten list was accurate at the time of publication, but readers can check CoinMarketCap for the latest data and prices.
Investing in Cryptocurrency
Crypto, and notably Bitcoin, has been one of the best investments of the past decade. While it’s impossible to predict if this trend will continue, it’s still wise for investors to understand the basics of crypto investing.
Crypto can be thought of as an asset class, just like stocks and bonds. However, there are some important differences to consider:
- Crypto trades 24/7, while stocks only trade during certain business hours
- Crypto can be stored with a custodian/exchange or placed on a physical or digital cryptocurrency wallet (more on this later)
- You can’t yet buy crypto through most stockbrokers (you must use a specific crypto exchange)
- Crypto prices can be volatile
- Crypto prices tend to move independently of the stock market, which can make crypto useful for diversification
- Crypto has a much shorter history than equities or bonds
- It’s very important to buy crypto through a trusted exchange or custodian
- Users should have some basic knowledge of how crypto works (and how to secure it) before buying in
- Transaction and trading fees are different for crypto investments
Another important consideration is that you can’t yet “buy cryptocurrency” in general — you must buy specific coins. There isn’t yet a way to buy into the entire market like you can do with a broad stock index fund.
For most beginner crypto investors, it’s best to stick to established coins. For the most part, this means Bitcoin (BTC) and Ethereum (ETH).
Altcoins, as the lesser-known coins are sometimes called, are best reserved for experienced crypto investors.
Should you invest in crypto?
Does crypto deserve a spot in your portfolio of investments? That’s up to your risk tolerance, investment goals, and overall strategy. It’s wise to consult a financial advisor for advice.
If you do decide to invest, keep in mind that most experts recommend that cryptocurrency be kept to a relatively small portion of your investment portfolio.
Financial experts surveyed by TIME Magazine in 2021 said that they would recommend a crypto allocation of 1–5% of your portfolio. Others have recommended up to 10%. And a recent Yale study found that 6% may be the optimal amount to hold in Bitcoin, specifically.
That means that if you have $100,000 invested total, anywhere from $0–$10,000 (0–10%) should be in crypto — and the rest should be in a diversified portfolio of stocks, bonds, and real estate.
Of course, your asset allocation is up to you. If you feel strongly that crypto is the future, you may wish to invest a larger percentage of your assets in cryptocurrency.
If you have questions about investing or want personalized guidance, it’s best to speak to a qualified fiduciary financial advisor.
How to buy crypto
When you buy crypto, you will essentially exchange another currency (USD, for instance) for the cryptocurrency (BTC, for instance).
All major cryptocurrencies are fractional, which means that you can invest almost any amount. You don’t have to buy a whole Bitcoin — you could get started with as little as $5 if you wanted to.
The simplest way for beginners to buy cryptocurrency is to use a centralized cryptocurrency exchange.
These exchanges function somewhat like a stockbroker (although they are regulated differently). Users can transfer in U.S. dollars from a bank account and can then purchase individual cryptocurrencies.
All exchanges will support popular coins like Ethereum and Bitcoin — and most will also support a wide range of altcoins.
Once you purchase crypto on one of these exchanges, you own it. However, unless you take steps to transfer it to your own wallet, the crypto will be stored by the exchange.
The exchange will act as a custodian and will store the keys necessary to prove ownership of your crypto assets.
For more control and potentially better security, users can transfer their assets to a crypto wallet.
For most people, having a dedicated wallet isn’t really necessary. As long as you choose a reputable exchange, you can rest assured that your crypto is safe — as long as you set a very good password and ideally set up two-factor authentication on your account.
Investing in crypto for your children’s future
For any parent reading, investing for your children’s future is likely on your mind. Whether that’s starting to save for college expenses or just building a general nest egg for your children, should crypto play a role in savings strategies?
In most cases, savings for children should be invested, which will allow money to grow over time. Traditionally, advisors have recommended a mix of stocks and bonds. And now, crypto presents a potential third asset class to mix in.
Because crypto typically moves independently from other asset classes like stocks and bonds, it can be useful for diversification.
By building a diverse portfolio, you can potentially increase your long-term returns while also potentially reducing volatility along the way.
There are substantial benefits to diversifying a portfolio.
The basic concept is this: You want to own all types of assets because you can never really predict which asset class is going to perform best at any given time. If you own a diversified basket of investments, you improve your odds of owning the best performers.
Because of its diversification benefits, adding in a small percentage of cryptocurrency may improve the overall health of your child’s portfolio.
Crypto may have higher potential returns than other assets, but with that often comes greater volatility. Parents should assess their risk tolerance when deciding whether or not to invest in crypto.
How to Talk to Your Kids About Crypto
Crypto is a hot topic right now for adults and kids alike.
For younger people, “joke” cryptocurrencies like Dogecoin and Shiba Inu are all the rage. While these joke coins based on dog breeds (yes, you read that right!) should likely be avoided, if crypto gets kids interested in finance in general, that can be a good thing!
So, what do you do if your child comes home talking about Dogecoin, Bitcoin, or non-fungible tokens (NFTs)?
Here’s how to proceed.
1. Explain it to them
As best you can, try to explain the basic concepts behind crypto, and answer any questions they may have. Of course, you’ll need to tailor this to their age and general financial literacy.
2. Make it relatable
Money itself is often an abstract concept for kids, and crypto can be even more confusing. To explain concepts, find something that is relatable to them.
For instance, many children are experienced with in-game currency for video games like Roblox or Minecraft. You can use these concepts to help explain crypto to kids.
If your child understands that they need to convert dollars into Robux in order to buy items on Roblox, you can explain how that’s similar to how dollars must be exchanged for Bitcoin.
3. Don’t dismiss it
Even if you personally don’t believe in cryptocurrency or think it’s a good investment, you shouldn’t immediately dismiss the concept if your child is talking about it. In fact, doing so may backfire, causing your kid to be even more interested!
4. Use it as a bridge to general finance concepts
Crypto excitement can be a gateway to talking to kids about general personal finance concepts such as saving, investing, debt, and more. It’s very important for children to learn the basics of personal finance — and it’s a topic that is rarely taught in schools.
Related: Understanding the Stock Market for Kids
5. Encourage investing simulation
If your child really wants to invest in crypto, start by explaining the risks — and teach them about building a balanced investment portfolio of stocks, bonds, cash, and crypto.
If they’re still interested in investing, encourage them to try out an investing simulation. There are crypto investing simulator apps available, as well as general investment simulators.
6. Consider starting an EarlyBird account
Your children are likely too young to do their own investing — but if they are interested, you can help by setting up an EarlyBird account on their behalf.
You, along with the other adults in their lives, can then contribute funds to the account and invest them in a diversified portfolio of stocks, bonds, and even cryptocurrencies. Learn more about EarlyBird here.
Conclusion
Cryptocurrency and blockchain technology are fascinating worlds that hold massive potential.
Increasingly, it seems that crypto is here to stay — although its role in the world (and in our investment portfolios) remains to be seen.
Whether you choose to invest in crypto or not, it’s helpful to understand the basics. This is particularly true for parents whose children may express curiosity about crypto topics.
If you are interested in optimizing investments for your child’s future, crypto could be a part of that equation. Either way, be sure to read our complete guide to investing for kids to learn more.
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This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.
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