Exploring Crypto Investment Opportunities For 16-Year-Olds

While there are no laws prohibiting minors from investing in cryptocurrencies, many U.S.-based crypto exchanges require users to be at least 18 years old. This means that 16-year-olds cannot legally invest in cryptocurrencies on their own. However, there are alternative ways for minors to invest in cryptocurrencies with the help of their parents or guardians. One option is to use a custodial account, where an adult opens and manages the account on behalf of the minor. Another option is to use a decentralised exchange, which does not have age restrictions but is riskier and requires the user to already own some cryptocurrency. It is important to note that investing in cryptocurrencies is risky and highly volatile, so anyone considering investing should do so with caution.

Crypto custodial accounts

There are several options for crypto custodial accounts, including those offered by crypto exchanges or custodial wallet providers in the form of mobile or web apps. One example is EarlyBird, which offers crypto investing as well as traditional investment choices like exchange-traded funds (ETFs). Crypto apps like Step also allow kids to buy and sell Bitcoin with a flat fee, but they require an adult sponsor to open an account for a minor.

It's important to note that while custodial accounts provide a way for minors to invest in cryptocurrencies, there are risks associated with any type of crypto investment. Cryptocurrencies are highly volatile and unregulated, so it's crucial for teens and their parents to understand the potential risks before investing.

When it comes to choosing between a custodial and non-custodial wallet, there are some key differences to consider. With a custodial wallet, users may find it more convenient as it requires less personal responsibility. However, it may be considered less secure since the user has to trust a third party to secure their funds. On the other hand, a non-custodial wallet gives the user full control over their private keys and funds, but it also requires them to take sole responsibility for safeguarding their crypto assets.

Crypto wallets

There are two main types of crypto wallets: hot wallets and cold wallets. Hot wallets are connected to the internet and are often available as a standalone product or as an add-on through popular crypto exchanges. They make it easy to execute crypto transactions but are more vulnerable to hackers. Cold wallets, on the other hand, are not connected to the internet and are typically hardware devices that look like USB sticks. They provide a more secure way to store your crypto but are less convenient to use.

When choosing a crypto wallet, consider factors such as security, supported currencies, accessibility, and customer support. Some popular hot wallet options include Coinbase Wallet, MetaMask, and Trust Wallet. For cold wallets, Ledger, Ellipal Titan, and SafePal are well-known options.

It's important to note that crypto investing is high-risk and mostly unregulated, so it's crucial to understand the risks and do your research before investing.

Crypto exchange-traded funds

In the US, people of any age can legally invest in cryptocurrencies. However, many US-based crypto exchanges, such as Coinbase or Binance.US, require users to be at least 18 years old. This means that, while it is legal for 16-year-olds to invest in crypto, they may face barriers to entry.

One way to get around this is to use a custodial account, an adult-managed investment account that allows a parent or guardian to open an account on behalf of a child. The assets legally belong to the child, but the account is managed by an adult.

Another option is to use a decentralised exchange, which is currently unregulated and has no age limits. However, these exchanges are highly risky and do not allow users to exchange fiat currency (such as US dollars) for crypto.

Crypto ETFs are a type of investment fund that tracks the price performance of cryptocurrencies. They were first approved by the US Securities and Exchange Commission (SEC) in 2024 and trade just like stocks. Crypto ETFs are much easier to buy than regular cryptocurrencies and come with strong regulations, offering investors greater security.

There are two main types of crypto ETF: spot ETFs and futures ETFs. Spot ETFs directly hold the cryptocurrency, building a portfolio that replicates the performance of the digital assets it contains. Futures ETFs, on the other hand, invest in futures contracts, which are agreements to buy or sell crypto at a preset date and price.

• Grayscale Bitcoin Trust ETF (GBTC)
• IShares Bitcoin Trust (IBIT)
• Bitwise Bitcoin ETF (BITB)
• ARK 21Shares Bitcoin ETF (ARKB)

Advantages of Crypto ETFs

• Exposure without ownership: Crypto ETFs allow investors to gain exposure to crypto without the additional expenses or risks of owning and holding the digital assets themselves.
• Simplified investment process: Crypto ETFs can be bought and sold through traditional brokerage accounts, making them more accessible to average investors.
• Liquidity benefits: ETFs are traded on public stock exchanges and can offer more liquidity than directly holding cryptocurrency.
• Accessibility in retirement accounts: Crypto ETFs can be included in traditional retirement accounts such as 401(k)s and IRAs, which might not be possible with direct cryptocurrency holdings.
• Regulated investment vehicle: Crypto ETFs traded on public stock exchanges are regulated financial products, offering investors legitimacy and security.

Disadvantages of Crypto ETFs

• Lack of direct ownership: Investors in crypto ETFs do not own the underlying digital assets directly.
• Restricted trading hours: Major public stock exchanges are not open 24/7, unlike cryptocurrency exchanges.
• Market volatility: Crypto ETFs are subject to the high volatility of the cryptocurrency markets.
• Regulatory uncertainty: It is still unknown how regulations in this area will evolve.
• Elevated fees and expenses: Crypto ETFs generally have higher fees than other ETFs.

Crypto risks

While cryptocurrencies have become increasingly popular, they are also highly volatile and carry significant risks for investors. Here are some key risks associated with investing in cryptocurrencies:

Volatility and Loss of Investment

Cryptocurrencies are highly volatile, meaning their value can fluctuate drastically and rapidly. This volatility can lead to significant losses for investors. For example, the value of Bitcoin dropped by about 70% from $68,000 in November 2021 to around $20,000 in September 2022. There is no guarantee that the value will rise again after a decline.

Regulatory Uncertainty

The regulatory landscape surrounding cryptocurrencies is still evolving, and government regulations can vary across different jurisdictions. A sudden change in regulations could impact how investors use or access their crypto, causing market volatility and uncertainty. Additionally, there is a risk that certain cryptocurrencies could be banned or restricted by governments.

Scams and Hacks

Cryptocurrency exchanges and wallets have been targeted by hackers over the years, resulting in the theft of millions of dollars worth of coins. Scams and fraudulent activities are also prevalent in the crypto space, and investors may fall victim to these schemes, losing their investments.

Lack of Protections and Insurance

Cryptocurrency payments typically do not come with legal protections or insurance. Unlike credit card or debit card transactions, it is challenging to dispute a cryptocurrency purchase or get your money back if something goes wrong. There is also no protection or insurance for lost or stolen cryptocurrencies.

User Risk and Technical Complexity

Once a cryptocurrency transaction is sent, it cannot be reversed or cancelled. Technical issues such as lost passwords or incorrect sending addresses can result in the loss of funds. The technical complexity of using and storing crypto assets can pose significant risks to new users.

Counterparty and Management Risks

Many investors rely on exchanges or custodians to store their cryptocurrency. In the event of theft or loss by these third parties, investors could lose their entire investment. Additionally, there are limited protections against deceptive or unethical management practices, and investors may lose substantial sums due to mismanagement.

Market Manipulation

Market manipulation remains a significant issue in the cryptocurrency market. Influential individuals, organizations, and exchanges may act unethically, manipulating the market and impacting investors.

Criminal Activities

Cryptocurrencies have become popular tools for criminal activities, such as money laundering and illicit purchases. The pseudonymous nature of transactions allows criminals to operate without revealing their identities.

High Energy Consumption

Mining popular cryptocurrencies requires a considerable amount of energy, sometimes as much as entire countries consume. This high energy consumption contributes to environmental concerns and can impact the perception and regulation of cryptocurrencies.

Crypto alternatives

While cryptocurrencies like Bitcoin, Ethereum, and Dogecoin are all the rage, there are several alternative investments that can help you diversify your portfolio without the risks that come with crypto investing. Here are some crypto alternatives:

Real Estate Investment Trusts (REITs)

REITs offer an opportunity to invest directly in commercial and residential real estate projects, with some paying out regular dividends from rents collected. This can be a great way to gain exposure to the real estate market while reducing risk.

Precious Metals

Gold, silver, and platinum are alternative investments that can provide stability and diversification to your portfolio. Gold, in particular, is seen as a store of value, with its purchasing power remaining relatively stable over time. While precious metals may not offer high returns, they can be a good way to hedge against inflation and market volatility.

Collectibles

Collectibles such as baseball cards, Pokémon cards, classic cars, and artwork have gained significant demand in recent years. Investing in collectibles can be risky, but they can also offer the potential for outsized returns. It's important to do your research and understand the market before investing in collectibles.

Crypto-Related Stocks

If you're interested in the crypto space but want to avoid the risks of investing directly in cryptocurrencies, you can consider investing in crypto-related stocks. For example, you can invest in companies like Coinbase Global Inc. (COIN), which is one of the biggest crypto exchanges, or explore other crypto-related companies in areas like blockchain technology and decentralized finance.

Other Cryptocurrencies

If you're looking for alternatives within the cryptocurrency space, there are several options beyond Bitcoin. Here are some popular alternatives:

• Ethereum (ETH): A decentralized platform that enables smart contracts and decentralized applications.
• Ripple (XRP): A payment system and currency exchange network that doesn't require mining.
• Litecoin (LTC): Similar to Bitcoin but with faster transaction speeds.
• Cardano (ADA): A proof-of-stake blockchain platform designed to be energy-efficient and support smart contracts.
• Binance Coin (BNB): The native cryptocurrency of the Binance exchange, used for trading and paying fees.
• Polkadot (DOT): A multi-chain network that connects different blockchains together.
• Solana (SOL): A public and open-source blockchain that focuses on speed and scalability.

Frequently asked questions