Investing In Crypto As A Minor: Is It Possible?

Investing in cryptocurrencies such as Bitcoin and Ethereum is an appealing prospect for teenagers, as it represents a departure from traditional investments such as stocks. While there is no legal age restriction on owning cryptocurrencies, most major crypto platforms require users to be adults, typically 18 or older. This means that minors often need the assistance of a parent or guardian to invest in crypto. Additionally, it's important to be aware of the risks associated with crypto investing due to its volatile nature.

Crypto for teenagers: the basics, blockchain, types, getting started, and risks/benefits

The Basics

Cryptocurrency is a digital representation of value used to buy and sell goods and services. It can also be used as an investment. Unlike centralized currencies (like the US dollar), the value of cryptocurrencies can increase dramatically depending on the market. Like any other currency, the value of cryptocurrencies fluctuates regularly.

Cryptocurrencies can be used like money in some cases, but they do not have legal tender status in many countries, including the United States. Although some websites may accept crypto as a payment option, the federal government does not recognize it as a valid or acceptable form of monetary value. For example, you cannot use cryptocurrency to pay taxes to the IRS in the US.

However, this may change over time, as several nations, such as El Salvador and the Central African Republic, have already voted to accept crypto as legal tender.

Blockchain

Blockchain is a decentralized network of computers that keeps track of all transactions made using a particular cryptocurrency. It is similar to how a bank keeps track of money flowing in and out of its accounts. The main difference is that since cryptocurrencies are decentralized, no single entity, like a bank, controls the network. Instead, the blockchain is maintained by a network of blocks that contain information and facilitate secure person-to-person transactions.

To tamper with the recording of transactions on the blockchain, one would need to change the records in all the distributed computers simultaneously, which is nearly impossible. This makes blockchain transactions extremely secure.

Types

The two most popular cryptocurrencies are Bitcoin and Ether. Bitcoin was the first cryptocurrency, created in 2009 by Satoshi Nakamoto. Ether, or Ethereum, is the second most valuable cryptocurrency, offered through a programmable blockchain that allows developers to build and deploy decentralized applications.

Other popular cryptocurrencies include Solana, Tether, Binance Coin, Cardano, and Dogecoin.

Getting Started

If you are under 18, you typically cannot buy financial assets on your own. Adults, usually parents, have to establish custodial accounts for you. They can manage the purchasing of the assets on your behalf, but you generally won't gain control over the assets until you turn 18.

To invest in cryptocurrency, it is easiest to go through a cryptocurrency exchange, such as Coinbase, Crypto.com, Gemini, or Kraken. These exchanges act as middlemen between buyers and sellers and usually charge a small fee for each transaction. However, none of these exchanges accept members under the age of 18, and they don't offer custodial accounts.

Therefore, your parents will need to create an account on one of these exchanges, deposit money, and then buy crypto directly from a vendor. It is recommended to use a cold wallet, or hardware wallet, to store the information needed to transact with the cryptocurrency, as it is the safest way to secure your crypto.

Risks/Benefits

Cryptocurrency is a risky investment, and young investors should be cautious about where they put their money. Cryptocurrencies like Bitcoin are extremely volatile, and their value can swing wildly. Additionally, there have been instances of leading crypto platforms and investors filing for bankruptcy, leaving customers stranded without access to their crypto deposits.

However, investing in cryptocurrency can be exciting for teenagers as it is innovative and different from how older generations invest. It also aligns with the modern world, where digital currencies are becoming more and more prevalent.

Additionally, investing at a young age can teach valuable lessons about risk, rewards, and losses, fostering better investment decisions in the future.

Crypto exchange-traded funds

Crypto ETFs are a type of investment fund that tracks the price performance of cryptocurrencies. They allow investors to gain exposure to the crypto market without directly buying, owning, or holding digital assets themselves. Crypto ETFs trade on regular stock exchanges, and investors can hold them in standard brokerage accounts.

Here's how crypto ETFs work:

• Spot ETFs: These ETFs directly hold and invest in actual cryptocurrencies, such as Bitcoin or Ethereum. They track the real-time or "spot" price of the cryptocurrency, allowing investors to participate in its rise or decline in value.
• Futures ETFs: These ETFs invest in futures contracts, which are agreements to buy or sell crypto at a preset date and price. They track the prospective value of a cryptocurrency rather than its current value.

Advantages of Crypto ETFs:

• Exposure Without Ownership: Crypto ETFs allow investors to gain exposure to cryptocurrencies without the additional expenses and risks associated with direct ownership, such as custody charges and the need to secure digital assets.
• Simplified Investment Process: Crypto ETFs can be bought and sold through traditional brokerage accounts, making them more accessible to average investors compared to buying crypto directly through an exchange.
• Liquidity Benefits: ETFs are traded on public stock exchanges and typically offer more liquidity than directly holding cryptocurrencies, making it easier to buy and sell.
• Accessibility in Retirement Accounts: Crypto ETFs can potentially be included in traditional retirement accounts like 401(k)s and IRAs, which might not be possible with direct crypto holdings.
• Regulated Investment Vehicle: Crypto ETFs traded on public stock exchanges are regulated financial products, offering legitimacy and security to investors.

Disadvantages of Crypto ETFs:

• Lack of Direct Ownership: Investors in crypto ETFs do not own the underlying digital assets directly, especially in the case of crypto futures ETFs.
• Restricted Trading Hours: Major public stock exchanges have specific trading hours, unlike the 24/7 operation of cryptocurrency exchanges.
• Market Volatility: Crypto ETFs are subject to the high volatility of the cryptocurrency markets, in addition to the risks associated with investing in stocks.
• Tracking Error: Crypto ETFs may not always accurately duplicate the price moves of the underlying digital token, especially for ETFs that depend on futures contracts, which have to be rolled over as contracts expire.
• Higher Fees: Crypto ETFs often have higher expense ratios than other ETFs due to active management. For example, the ProShares Bitcoin Strategy ETF has an expense ratio of 0.95%, while a typical S&P 500 ETF has a ratio of 0.09%.

Examples of Crypto ETFs:

• Grayscale Bitcoin Trust ETF (GBTC): The first and largest Bitcoin ETF.
• IShares Bitcoin Trust (IBIT)
• Bitwise Bitcoin ETF (BITB)
• ARK 21Shares Bitcoin ETF (ARKB)
• ProShares Bitcoin Strategy ETF (BITO): The first and largest U.S. cryptocurrency futures ETF.
• ProShares Ether Strategy ETF (EETH): An ether futures ETF.
• Amplify Transformational Data Sharing ETF (BLOK): Invests in companies involved in blockchain technology and cryptocurrency-related businesses.
• Bitwise Crypto Industry Innovators ETF (BITQ): Provides exposure to cryptocurrency mining, exchanges, and other crypto-related services.

Crypto ETFs provide a bridge for traditional investors to enter the digital currency space. They offer a regulated and simplified way to gain exposure to crypto price movements without the complexities of direct ownership. However, it's important to consider the disadvantages, such as the lack of direct ownership, restricted trading hours, and higher fees.

Crypto wallets: hot and cold

When it comes to storing your cryptocurrency, you have options: hot wallets, cold wallets, or a combination of both. Each type of wallet has its own advantages and disadvantages, catering to different needs and preferences.

Hot Wallets

Hot wallets are typically connected to the internet, making them convenient for regular transactions. They are often software-based and can be accessed through devices like smartphones or laptops. While their online nature makes them vulnerable to potential hacks and theft, they are generally easier to use and facilitate quick transactions. Examples of hot wallets include MetaMask, Coinbase Wallet, and Edge Wallet.

Cold Wallets

Cold wallets, on the other hand, are offline wallets that provide a higher level of security for your cryptocurrencies. They are usually hardware-based, such as a thumb drive or a hardware wallet like Ledger Nano S, and are not connected to the internet. This makes them less susceptible to online attacks but less convenient for frequent transactions. To use a cold wallet, you would need to connect it to an online device and transfer the necessary amount to a hot wallet for transactions.

Combining Hot and Cold Wallets

Combining hot and cold wallets can offer the best of both worlds. You can use a hot wallet for everyday transactions and keep a small amount of cryptocurrency in it, while a cold wallet serves as a secure, long-term storage solution for larger amounts. This way, you balance convenience and security. Some people even use a secondary phone dedicated solely as a mobile crypto cold wallet for added convenience and peace of mind.

Crypto accounts for minors: custodial accounts, joint accounts, and apps

Minors cannot buy, sell, or trade any type of securities, including cryptocurrencies. However, there are still ways for them to invest in crypto with the help of a parent or guardian. Here are some options:

Custodial Accounts

Custodial accounts are owned and managed by an adult on behalf of a minor. The assets in the account belong to the minor, and the adult custodian makes investment decisions. Custodial accounts can hold various securities, including stocks and mutual funds, and, increasingly, cryptocurrencies such as Bitcoin and Ethereum. These accounts are typically transferred to the minor when they reach the age of majority.

Some examples of custodial account providers include:

• EarlyBird: Allows parents to invest in a range of assets, including cryptocurrencies, on behalf of their children.
• Vanguard: Offers a variety of accounts, including UGMA and UTMA custodial accounts, with a broad range of investment options and low fees.
• Acorns: Provides easy-to-set-up custodial accounts and access to educational resources and family financial advice.

Joint Accounts

Joint brokerage accounts are co-owned by two people, typically spouses, but a parent can also open a joint account with their minor child. Both owners have equal rights and say in investment decisions. Therefore, if you want to include crypto in a joint account, ensure the account supports the desired coin(s).

Apps

Some apps allow minors to earn crypto without directly purchasing it. For example:

• Step: A unique "hybrid" secured credit card that helps build a child's credit history. It offers an "invest" function that allows children aged 13 and older to buy and sell Bitcoin for a small transaction fee.
• EarlyBird: Adults can open a crypto wallet for children through a custodial account and start investing in cryptocurrencies.

Legal considerations for minors

The legal landscape surrounding cryptocurrency investments for minors is complex and varies across different jurisdictions. In most countries, there is no specific law prohibiting individuals under 18 from buying cryptocurrencies. However, the absence of legal restrictions does not imply unrestricted access. The majority of reputable cryptocurrency exchanges have implemented their own policies, prohibiting users under 18 from registering and trading on their platforms. These exchanges often require identity verification, such as Know Your Customer (KYC) checks, which prevent minors from signing up.

To circumvent these restrictions, some minors may consider using alternative exchanges that do not enforce age verification or identity checks. While this approach may provide a means to acquire cryptocurrencies, it is important to recognize the potential risks associated with such exchanges. These platforms may lack the same level of security, regulatory oversight, and consumer protection as the more established exchanges.

It is crucial for minors to understand the legal implications of their actions. While there may not be explicit laws against investing in cryptocurrencies as a minor, engaging in activities that circumvent the policies of reputable exchanges could potentially lead to legal consequences.

To navigate this complex landscape, minors should seek guidance from their parents or legal guardians before making any investment decisions. It is important to conduct thorough research, understand the risks involved, and never invest more than one can afford to lose. Additionally, minors should be aware of the volatile nature of the cryptocurrency market, where values can fluctuate significantly.

In some cases, minors may have the option to utilize Bitcoin ATMs, which allow for the purchase and sale of cryptocurrencies without the need for extensive identity verification for smaller transactions. However, it is important to be mindful of the transaction charges associated with these ATMs.

Another option for minors is to explore decentralized exchanges (DEXs), which facilitate peer-to-peer trading without the need for centralized intermediaries. These platforms offer anonymity and do not require identity verification, making them accessible to users under 18. Nevertheless, due diligence is still essential, and minors should only invest what they are willing to lose.

Furthermore, minors can explore opportunities to earn cryptocurrencies through freelancing. Various crypto-focused freelance websites enable individuals to offer their skills, such as software development or content writing, in exchange for cryptocurrency payments. This approach allows minors to acquire cryptocurrencies without the legal and regulatory constraints associated with traditional exchanges.

While the legal considerations for minors investing in cryptocurrencies may vary across jurisdictions, it is always advisable to seek guidance from parents or legal guardians and to prioritize safe and compliant investment practices.

Frequently asked questions