How to explain cryptocurrency to children

Cryptocurrencies are a relatively new concept for most parents, and can seem overwhelming and complex. Here’s what you need to know to help you discuss them with your kids.

Cryptocurrencies are a relatively new invention, and many of us might feel at a loss if asked about them by kids or teens. But technological advancements mean that cryptocurrencies will likely play a role in your child’s future financial life, so it’s important to start the conversation about them sooner rather than later.

This article will help you understand cryptocurrencies and arm you with the essential information, so you can easily and openly discuss cryptocurrencies with your child.

What are cryptocurrencies and when did they go mainstream?

Cryptocurrencies are a form of digital money operated via a decentralised system, meaning they aren’t regulated by banks or governments. Their value, like traditional money, is based on supply and demand, and then secured by algorithms.

Cryptocurrencies went mainstream with the launch of Bitcoin in 2009. Since then, thousands more cryptocurrencies have been created. Unlike traditional money, you can’t hold physical cryptocurrencies. Instead, you look at them in your digital wallet, or on a blockchain, which is a bit like a spreadsheet with your item’s purchase history on it.

It’s important to understand that cryptos are actual currencies, rather than electronic payments

When you use a cryptocurrency, it’s like paying cash for something direct to the seller – once it leaves your digital wallet and settles in the other person’s, it’s gone. You can’t change your mind or cancel it. Although trading in cryptocurrency has hit the headlines, acceptance of different cryptocurrencies as a method of payment is not universal.

What’s the appeal of cryptocurrencies?

Cryptocurrencies can be quick and simple to use – so much so that institutions like the Bank of England are also looking into creating their own digital currencies, using some of the same technology.

Some people also see the idea of separating money from government and bank control as a way to avoid things like inflation, or as a way of keeping their financial transactions secure and anonymous.

What are the risks of cryptocurrencies?

Unlike traditional finance, the crypto sector is largely unregulated, and the value of each cryptocurrency is derived from the ongoing willingness for people to purchase and use it.

When you invest in traditional assets, banks are legally obliged to tell you about any risk involved that means your investment could reduce in value. But in crypto, that’s not the case. It’s essentially a free-for-all, and irreversible and fast transactions mean you are very much on your own when buying and selling.

Cryptocurrencies are also a relatively new phenomenon, often giving them a higher fail rate. Your child could invest in something that sounds amazing, but if they run out of money and go bust, the crypto token your child bought will be totally worthless.