There’s so much to cover on the subject of how cryptocurrency and NFTs, or non-fungible tokens, will affect the next generation of investors that I’m going to dedicate two articles to it. The second article, focusing on NFTs, will be published in a few weeks. This first article focuses on kids and cryptocurrency, specifically how parents can teach and introduce their offspring to the new world of digital assets…their future.
Before I get into if or when you should start introducing kids and grandkids to crypto and other digital commodities, I’ll give you an overview.
The new World
Your world is just a click away. Your phone and computer connect you to others and to the world in a way that is now the new normal. We keep in touch with friends; we run our businesses; we network with companies; We play games; we watch crazy videos and share them; we buy and sell every product and service imaginable; we pay bills and transfer money; and we buy and sell art and collectibles.
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Smartphones are part of our life. In the United States, there are 294.2 million (opens in a new tab) smartphone users (the number is 6.6 billion worldwide (opens in a new tab)). 85% of American adults use smartphones. And what’s interesting is that 47% of US users (opens in a new tab) say they couldn’t live without their devices.
Our next generation
NPR reports (opens in a new tab) that more than half of the children in our country own a smartphone before the age of 11. This does not include smartphone use by children whose parents return their devices. Young children play video games and older teenagers (opens in a new tab) are not only games, but also social media, texting, clicks on YouTube, TikTok and other sites. In fact, EdSource.org (opens in a new tab) reported that children 8 and under spend at least 48 minutes a day on a mobile device.
The figures show us that the digital world is part of the world. Games and social media are one thing to understand, but I think many older generations are confused by the thought of digital money and digital art. I recommend that parents try to understand this new world and educate their children, rather than hiding their heads in the sand.
Let’s start with the basics of the evolution of money as medium of exchange.
Why Money Was Invented
Once upon a time around 10,000 years ago, people lived where they could easily move from place to place to find food. When a group of people met another group, they sometimes saw new things that they wanted, which led to barter between groups to exchange goods and services.
Barter quickly became complicated because it became too difficult to assess the value of things. You can only tell the worth or value of something by knowing what people are willing to give you in exchange for what you have or the service you can render. So people started using a medium of exchange, or a common measure of value. For example, if seashells were used as a common medium of exchange, the value of everything was measured in seashells.
People quickly discovered that they needed to control the supply of the medium of exchange to make it all work. Precious metals, like gold and silver, were hard to come by and could be controlled by rulers or countries, so they became good mediums of exchange. The value could be stamped on these early coins so everyone knows their value.
Before you transform into the digital world
The new digital world is important, but I believe you need to start your child’s financial education with physical money. Pay small children in coins and bills when they finish their chores or when you give them money. Then go to the bank and open joint savings and checking accounts with them.
When you get home, show them how their accounts are now online. Their money is going digital, but they saw it was real before it goes digital. They need to start understanding the difference between “video game money” and real money.
The next step is to help kids learn how they can spend their money with a debit card, which is digital money. It’s a great way to put “training wheels” on their first financial vehicle.
The educational process must continue. I spoke to Johnson Cook, co-founder and president of Greenlight (opens in a new tab), a family fintech. (I’m a Greenlight advisor.) Cook told me, “We recommend that parents start young and actively engage with their children about money. First, kids should learn the basics of money management – how to earn and save – and then move on to investing from there. It’s important for kids to learn about financial responsibility using real financial tools. Our debit card and banking app is a great way to start a life of money lessons.
Fast forward in the digital world
Now for the fun part. Remind your children that a medium of exchange is anything people agree to use to buy and sell goods or services. Also explain to them that now when you use a debit card, credit card, or PayPal, you are using digital money. You don’t pay for everything you buy with a stack of bills and coins. A few years ago, the digital currency called cryptocurrency (opens in a new tab) has also become a medium of exchange, a new currency allowing people to buy and sell things only in the digital world.
When people first experimented to see what mediums of exchange would work best, some of the things they tried were feathers, pine cones, dog teeth, boar hair, shells, axes and, my favorite, dead rats! You can imagine most of them didn’t get the job done.
Likewise, there are many different cryptocurrencies. A big difference between ancient money and crypto today is that crypto and blockchain (opens in a new tab) the worlds are not controlled by anyone. In ancient times, like today, rulers or governments controlled money. With crypto, everyone can see all the “money” that is created, bought, and sold on a public ledger that people call the blockchain.
Another big difference between cryptocurrency and conventional money is that the value of buying or selling something goes directly to the person’s digital wallet, rather than filtering through the banking system, as it does. is the case with credit and debit card purchases.
Also, remember that long ago people had to decide the value of something based on what other people were willing to give them in exchange for their goods or services in the market? Cryptocurrencies work the same way – their value will rise and fall based on different economic and market perceptions, as well as supply and demand.
Just like you have a wallet for your notes, coins and cards, with cryptocurrency you have a digital wallet (opens in a new tab) which requires you to have your own secret password or private key. You use this digital wallet every time you buy or sell something using cryptocurrency.
Should you buy a cryptocurrency?
I do not give investment advice. The values of cryptocurrencies can fluctuate, like any asset or currency. For example, bitcoin (opens in a new tab), the best-known cryptocurrency, was introduced about 10 years ago. Its exit value was a fraction of a dollar. In 2011, it reached parity with the dollar, meaning one bitcoin was worth just over $1. In November 2021, it hit an all-time high of over $68,000 (opens in a new tab) by bitcoin. Today the price is below $20,000 (opens in a new tab).
These wild swings create risks. But, if you are young and have time on your side, a small part of your investment portfolio could definitely contain cryptocurrency. My big word of warning is not to become a day trader in crypto or, frankly, any investment asset. Day traders follow the market and try to guess the fluctuations. The problem is that it is really difficult to time the market and anticipate fluctuations. The majority of day traders lose money (opens in a new tab).
Children and cryptocurrency
Your financial literacy classes for your kids should include crypto lessons. Start with the story, let the children research and explain it to you. Technically, children can own cryptocurrency (opens in a new tab); there is no legal age restriction. However, in practice, some of the cryptocurrency exchanges have a minimum age of 18 to purchase it.
Challenge children to answer questions such as:
- What is Crypto?
- How can it be used?
- How do you buy it?
- What is a blockchain?
- What is your digital wallet and how does it work?
You can think of more questions.
Victor Wang, CEO of Stockpile (opens in a new tab), told me, “You should think about involving your children in crypto investing, which is why we offer it as an investment alternative on our platform.” He joked: “A famous marathon runner once said that ‘the hardest part of any race is the journey from bed to floor.’ One of the reasons we offer crypto to kids and parents is because they want it. 55% of kids in a recent survey have an active interest in crypto investing. Financial literacy is one thing; financial experience is another.
What’s exciting is that you and your child can step into the water to learn and win together.
And you might want to keep in mind this quote from Ralph Waldo Emerson: “Don’t be too timid and delicate about your actions. All of life is an experience. The more experiments you have, the better.
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).
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