A Beginner's Guide To Cryptocurrency Investment For Teenagers

Cryptocurrency is a digital currency that can be bought, sold, and traded on an encrypted network called the blockchain. It is not issued or controlled by any government or financial institution, and its value is determined by supply and demand. While anyone can invest in cryptocurrency, regardless of age, many platforms that support crypto, such as Coinbase and PayPal, require users to be 18 or older. So, if you're 16 and interested in investing in crypto, you may need to seek the help of an adult to set up an account and guide you through the process of trading and acquiring crypto.

There are a few ways to get started with crypto investing as a minor:

- Using a crypto exchange like Kucoin, which requires only partial know-your-customer (KYC) verification.

- Opening a custodial account through an app like EarlyBird, which allows adults to set up investment accounts and crypto wallets on behalf of minors.

- Using a joint brokerage account, where a parent or guardian opens an account with the minor and both have equal rights to decide which investments to buy and sell.

- Using a crypto app like Step, which offers a secured credit card for teens and a finance app that lets kids buy and sell Bitcoin within the app under adult supervision.

It's important to remember that investing in cryptocurrency carries significant risks, including volatility, high transaction fees, and the potential for fraud or hacking. As with any investment, it's crucial to conduct thorough research before getting started.

Crypto Custodial Accounts

There are no laws or regulations that prevent minors from investing in cryptocurrencies. However, many U.S.-based crypto exchanges require users to be at least 18 years old. This means that teenagers who want to invest in cryptocurrencies will need to do so through a custodial account.

With a custodial account, a third party will take custody of the private key instead of the minor. The third party will have full control over the crypto assets, assuming responsibility for managing the wallet key, signing transactions, and protecting the user's crypto assets. This means that users must trust the service provider to securely store their tokens and implement strong security measures to prevent unauthorised access.

There are a few options for crypto custodial accounts. For example, EarlyBird is one of the first custodial accounts to offer crypto investing. You can deposit funds into your child's EarlyBird account and choose to invest in Bitcoin or Ethereum within the account. EarlyBird also supports investing in exchange-traded funds (ETFs) and other traditional investment choices.

Another option is to use a decentralised exchange, which processes transactions directly on the blockchain. These exchanges are currently unregulated, so there are no age limits on their use. However, teens will need to connect their own digital wallets and already have crypto to trade. It is important to note that these exchanges are highly risky.

When it comes to choosing between a custodial and non-custodial wallet, it ultimately depends on the user's preferences and needs. Custodial wallets may be considered less secure but are often more convenient and require less responsibility from the user. On the other hand, non-custodial wallets give users full ownership and control of their cryptocurrency and private keys but require the user to take full responsibility for safeguarding their funds and keys.

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. Examples of hot wallets include the Coinbase Wallet, MetaMask, and TrustWallet.

On the other hand, cold wallets are not connected to the internet and are designed to store your digital keys offline, either on a hardware device or a physical medium like paper. They are less convenient to use but offer stronger security. Examples of cold wallets include the Ledger Nano S Plus and SafePal.

When choosing a crypto wallet, it is important to consider factors such as security, functionality, cost, and the types of cryptocurrencies supported. Additionally, active traders may benefit from having both a hot wallet for frequent transactions and a cold wallet for long-term storage.

Crypto Exchange-Traded Funds

Crypto ETFs were approved by the US Securities and Exchange Commission (SEC) in 2024. They are much easier to buy than regular cryptocurrencies, as they trade just like stocks. Crypto ETFs are also highly regulated, which provides security for investors.

There are two main types of crypto ETFs: 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.

Some examples of prominent crypto ETFs include:

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

While crypto ETFs provide a more accessible way to invest in cryptocurrencies, they also come with certain disadvantages. For example, crypto ETFs do not always duplicate the price moves of the underlying digital token, especially for ETFs that depend on futures contracts. Additionally, crypto ETFs have higher fees than other ETFs, and there is no oversight in the crypto markets where the funds are invested.

Overall, crypto ETFs offer a convenient and regulated way to gain exposure to the cryptocurrency market, but investors should be aware of the potential drawbacks and risks involved.

Blockchain and Cryptocurrency Basics

Cryptocurrency is a virtual or digital currency that can be bought, sold, or used as a form of payment. It is decentralised, meaning it is not issued or controlled by a central authority like a government or bank. Instead, it is secured by cryptography and operates on a peer-to-peer system. Cryptocurrency is also known for its high level of anonymity.

Cryptocurrency is built on a decentralised network of computers called a blockchain. The blockchain acts as a digital ledger, recording all transactions made using the currency. Each computer in the network, or node, has an identical copy of the ledger, ensuring security and transparency. When a transaction is made, it is broadcast to the network, and through complex cryptographic algorithms, the transaction is verified and added to the ledger.

Types of Cryptocurrency

There are two main types of cryptocurrency: coins and tokens. Coins are native cryptocurrencies that exist within their blockchain, such as Bitcoin and Litecoin. Tokens, on the other hand, are built on top of existing blockchain networks and can be used for various purposes beyond exchange, such as managing access or tracking products.

How to Invest in Cryptocurrency

Investing in cryptocurrency typically involves using a crypto exchange, such as Coinbase or Binance. These exchanges allow you to buy, sell, and store cryptocurrencies. You will need to create an account, deposit funds, and then use those funds to purchase your chosen cryptocurrency. It is important to note that some exchanges have age restrictions, typically requiring users to be 18 or older.

Crypto Wallets

When you buy cryptocurrency, you will need a crypto wallet to store it. A crypto wallet holds the keys or passwords to your cryptocurrency, keeping it secure. There are two main types of wallets: hot wallets and cold wallets. Hot wallets are online wallets connected to the internet, making them convenient but more vulnerable to hacks. Cold wallets, on the other hand, are offline wallets that are not connected to the internet, making them more secure but less convenient to access.

Risks and Benefits of Investing in Cryptocurrency

Cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Cryptocurrencies are decentralized, meaning they are not issued or regulated by any central government authorities and are theoretically immune to government interference or manipulation.

Benefits

• Inflation protection: Cryptocurrencies have a cap on the total number of coins that will ever be minted, so as the growth of the money supply outpaces the growth in the supply of coins, the price of the coins should increase.
• Transaction speed: Cryptocurrency transactions can be completed in a matter of minutes, whereas most transactions at U.S. financial institutions settle in three to five days.
• Transaction costs: The cost of transacting in cryptocurrency is relatively low compared to other financial services. There are also no third-party intermediaries involved in the transactions, so no additional fees are incurred.
• Accessibility: Anyone with a computer or smartphone and an internet connection can use cryptocurrency. The process of setting up a cryptocurrency wallet is extremely fast and does not require ID verification, a background check, or a credit check.
• Diversification: Cryptocurrencies can offer investors diversification from traditional financial assets such as stocks and bonds. The prices of cryptocurrencies appear to be uncorrelated with other markets, making them a good source of portfolio diversification.
• High returns: The high volatility of cryptocurrencies means that there is a chance of greater returns.

Risks

• Price volatility: Cryptocurrencies often see extreme price fluctuations, which can result in substantial losses.
• Security: There are security vulnerabilities that may pose significant risks, especially to new investors. For example, if you lose the private key to your crypto wallet, there is no way to recover your funds.
• Scams: The technical complexity of using and storing crypto assets can be a significant hazard to new users, and there is no protection or insurance for lost or stolen cryptocurrencies.
• Regulation: The regulatory landscape around cryptocurrencies is constantly evolving and may differ based on where you live. Regulations could impact how you use or access your crypto, causing volatility and uncertainty.
• Learning curve: Cryptocurrencies can take a while to get your head around, especially if you are not a digital native.
• Scalability: Cryptocurrencies have major issues that make it difficult to roll them out on a large scale.

Frequently asked questions