Cryptocurrency is a type of digital asset that has become a popular investment opportunity in recent years. The cryptocurrency system relies on blockchain technology to transfer cryptocurrency between investors and record transactions. Although the term contains the word “currency,” cryptocurrency operates more like other investments than it does like an actual currency. Cryptocurrencies, unlike the U.S. dollar or euro, are not considered legal tender and are not as widely accepted.
According to a March 2022 NBC News Poll report on CNBC, more than one in five Americans have traded in cryptocurrencies. However, cryptocurrency can be difficult to understand and there are risks to consider. If you’re a teenager or the parent of one, learn the basics about what cryptocurrency is, investing in cryptocurrency, the risks of cryptocurrency, and more.
Key Takeaways
- Cryptocurrency is a type of digital asset that operates using blockchain technology to record transactions.
- You can get cryptocurrency either by mining it or purchasing it on a cryptocurrency exchange.
- While teens usually can’t open their own crypto trading accounts, they can get cryptocurrency in other ways or have a parent invest on their behalf.
- Cryptocurrency investing comes with plenty of risks, including its volatility, speculative nature, and regulatory uncertainty.
What Is Cryptocurrency?
Cryptocurrency is a type of virtual currency with its value secured through cryptography and transactions recorded through blockchain technology. Cryptocurrency dates back to 2009 with the creation of bitcoin. And while bitcoin remains the most popular cryptocurrency by market capitalization (the amount that all the existing bitcoins are worth), as of July 2022, there are more than 20,000 cryptocurrencies on the market, according to CoinMarketCap.
A defining feature of cryptocurrency is its decentralized nature. The system isn’t operated by the traditional gatekeepers of the financial industry, such as major banks or brokerage firms. It also isn’t regulated by the government in the same way that physical currencies and securities such as stocks and bonds are. This decentralization is a part of what has made cryptocurrency so appealing to some investors—but what also makes it risky.
Many cryptocurrencies are created through a process called mining, which uses powerful computer processes to create and verify additional blocks of coins. The miners receive rewards for their efforts. Once it’s mined and newly created cryptocurrency is made available, individual investors can buy and sell the cryptocurrency on a crypto exchange platform, which is like a marketplace.
Investing in Cryptocurrency
The process of investing in cryptocurrency is similar to investing in any other security, such as a stock or bond. Generally speaking, you buy a particular coin with the hopes of it increasing in value in the future.
Cryptocurrencies are most often bought and sold through centralized cryptocurrency exchanges. Some cryptocurrency trading platforms allow you to trade your “fiat currency,” such as U.S. dollars, for cryptocurrency. Some may also allow you to trade one cryptocurrency for another. For example, if you already own bitcoin, you could use that bitcoin to purchase ethereum, which is a different cryptocurrency.
To buy cryptocurrencies, you need a cryptocurrency wallet. A wallet stores information that allows you access to your cryptocurrencies. You also need your wallet to make any cryptocurrency transactions.
Can Teens Invest in Cryptocurrency?
There’s no legal minimum age to own cryptocurrency, meaning teens can technically start investing at any age. That said, most popular cryptocurrency exchanges, such as traditional brokerage firms, prevent anyone under 18 years of age from opening a trading account.
“Whilst this makes it more difficult for teenagers to invest in cryptocurrency, it doesn't make it illegal,” said Harry Turner, a former hedge fund manager and the founder of The Sovereign Investor, a trading information and education website. “There are other ways for teens to get involved, like buying peer-to-peer, or through a decentralized exchange—which don't have KYC requirements.”
Note
The KYC—or Know Your Customer—requirements state that financial institutions must have written policies to help them verify the identity of their customers, their customers’ risk profiles, and more.
In addition to the loopholes that allow teens to legally invest in cryptocurrency, there are also ways for parents to buy cryptocurrency on their teen’s behalf. Custodial accounts are brokerage accounts an adult opens on behalf of a minor.
The adult who opens the account—known as the custodian—can buy and sell financial assets. Those assets then are transferred to the minor when they reach adulthood. Investment start-up company Onu offers cryptocurrency custodial accounts, but there aren’t many other providers with custodial accounts for cryptocurrency investments.
Custodial accounts that hold assets such as stocks are much more common. One way to gain exposure to cryptocurrencies through a regular custodial account is by investing in stocks of companies with significant cryptocurrency operations, such as a cryptocurrency exchange, a cryptocurrency mining company, or a company that manufactures cryptocurrency mining equipment.
Risks of Investing in Cryptocurrency
If you’re considering investing in cryptocurrency—or investing on behalf of your teen—it’s important to understand the risks you could face. Every type of investment involves some risk, but there are some that are either specific to cryptocurrency or more prevalent with cryptocurrency than with other investments.
Price Volatility
One of the most common risks of cryptocurrency is its price volatility. While any financial asset can experience price swings, these swings appear to be more dramatic for cryptocurrencies than they are for many other investments.
Take bitcoin, for example. On multiple occasions, the price of bitcoin has risen exponentially before declining steeply. In 2017, bitcoin prices soared from a little under $800 in January to more than $20,000 in December, before crashing to a little over $3,300 in February 2019.
In the eight months between November 2021 and June 2022, bitcoin experienced price highs of more than $68,000 and price lows of less than $18,000—meaning the digital asset lost more than 74%, or two-thirds, of its value. Even in just the 90-day period from April to July 2022, the asset fell from a high of nearly $40,000 to a low of less than $18,000.
It's not that the stock market is immune to volatility. But even in the most significant modern recession, starting from the peak in October 2007 to the bottom in March 2009, the stock market fell only close to 50%.
Highly Speculative
Another risk of cryptocurrency is its highly speculative nature. When you invest in a company, you’re making some assumptions about its future success. Cryptocurrency prices, like those of stocks, are determined by demand and supply. But whether the company’s stock price rises or falls is often based at least partially on investors’ perception of the company’s financial performance.
However, in the case of cryptocurrency, price fluctuations can appear more arbitrary. The value of any cryptocurrency isn’t necessarily tied to the performance of a company.
Regulatory Uncertainty
Cryptocurrencies aren’t necessarily regulated in the same way as other financial assets. First, the Securities and Exchange Commission (SEC) considers bitcoin a commodity. As a result, it does not directly regulate investments into bitcoin; however, it does have jurisdiction over investment products such as funds and ETFs that invest in cryptocurrencies.
Second, while bitcoin is considered a commodity, not all cryptocurrencies are classified in that manner. In fact, the SEC believes that many cryptocurrencies sold via initial coin offerings (much like an initial public offering, or IPO, for a stock) may be securities that need to be registered with it.
Just as there’s a lack of clear regulation for cryptocurrencies themselves, there’s also a lack of regulation for cryptocurrency exchanges. Exchanges and brokerage firms where you would buy stocks must meet certain regulatory standards. However, cryptocurrency trading platforms don’t fall under those regulatory umbrellas.
Risk of Fraud
Fraud and scams exist in every financial market, but they are especially prevalent when it comes to cryptocurrency. And the lack of regulation makes the risk of fraud even greater.
If you’re considering investing in cryptocurrency, it’s important to keep your eye out for red flags that could be signs of fraud.
Note
Signs of scams could include pressure to buy a particular cryptocurrency or a new asset without any history to look at. Generally speaking, if it sounds too good to be true, it probably is.
Lack of Insurance
The Securities Investment Protection Corporation (SIPC) protects investors’ money in brokerage accounts. If the broker goes bankrupt or goes out of business, the SIPC compensates investors for their losses.
Note
Cryptocurrency investments are not protected by the SIPC or the Federal Deposit Insurance Corporation (FDIC).
If your assets suddenly disappear from your trading account, or the cryptocurrency exchange that holds your assets goes out of business, there’s no recourse to recover your losses.
Alternative Investments To Consider
Cryptocurrency can be an exciting investment opportunity, but it’s one of many options available to teens and their families.
If you’re looking for investment opportunities to save for a teen’s future, consider one of the three primary asset classes: stocks, bonds, and cash. Stocks—also known as equities—allow an investor to buy a share of ownership in a corporation. There are plenty of ways to invest in stocks, including through diversified index funds such as a total stock market index fund or an S&P 500 index fund.
Bonds, on the other hand, are debt securities. Unlike stocks, which are most profitable due to their capital appreciation, bonds are popular because of the interest income they provide. The interest income you earn from bonds can be reinvested in other assets to help you grow your portfolio even more.
Generally speaking, teens can’t open their own brokerage accounts. However, there are plenty of ways for families to invest on behalf of their teens. Examples include 529 college savings plans, custodial brokerage accounts, and custodial Roth IRAs.
Frequently Asked Questions (FAQs)
What is cryptocurrency mining?
Cryptocurrency mining is the process of creating new blocks of cryptocurrency by verifying and recording new transactions. While miners are rewarded by earning some of the cryptocurrency they mine, the cost of mining equipment and the chance of claiming the reward depend on the cryptocurrency being mined. For example, bitcoin mining is unlikely to be profitable for an individual miner because of intense competition due to limited supply of bitcoin, very expensive mining equipment, and the enormous amount of energy required to mine it.
How is cryptocurrency taxed?
Cryptocurrency is treated like property for tax purposes. Cryptocurrency transactions could be subject to capital gains taxes if you sell the currency for more than you bought it. You may incur taxes for using cryptocurrency to pay for goods and services.
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