A lot has been happening in the crypto world recently. First, China banned the mining and trading of Bitcoin, the world’s largest cryptocurrency. Soon after, El Salvador made Bitcoin one of its two official currencies, along with the US dollar. Additionally, there are significant concerns about the heavy usage of energy cryptocurrencies require. 

Amidst all of this uncertainty, the price of almost every cryptocurrency has tanked, which could create a good buying opportunity. But what exactly is cryptocurrency, and how do you invest in it? Can teenagers invest in cryptocurrency? These are the questions I’ll be answering in this article.

How cryptocurrencies work

Cryptocurrency is a word thats often used, but many people don’t understand how it works even on a basic level. Understanding your investments is crucial so that you can evaluate whether or not it’s a good investment.

“A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation” – Investopedia. 

This all sounds really complicated but simply put, cryptocurrencies are digital currencies that aren’t issued by a central authority but are still secured by utilizing blockchain technology. 

“Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. The decentralized database managed by multiple participants is known as Distributed Ledger Technology (DLT)” – Euromoney.

Blockchain is an extremely interesting and confusing concept, but it isn’t necessary to fully understand it in order to start investing in cryptocurrency.

Cryptocurrency? 

Although the name “cryptocurrency” implies that cryptocurrencies are, in fact, currencies, it’s argued that this is not the case. Cryptocurrencies are usually treated like assets, taxed by the government with rules and regulations about who can buy them. This has made many people question whether cryptocurrencies are actually currencies or rather assets. 

But this question was made more complex as El Salvador made Bitcoin –the largest cryptocurrency – one of its official currencies. This was extremely big news that has helped to legitimize cryptocurrencies but also made it less clear exactly what cryptocurrency is.

Examples of cryptocurrencies:

“Cryptocurrency” is a broad umbrella term describing a diverse array of investments with different functions and use cases. Here are some examples of the largest cryptocurrencies:

Bitcoin

Bitcoin is the first and – biggest in terms of market cap – cryptocurrency. 

“As part of the transition toward a digital economy, bitcoin could challenge gold as a global store of value. Economic history suggests that an asset accrues value as the demand for it increases relative to the supply. Demand is a function of an asset’s ability to serve the three roles of money: store of value, medium of exchange, and unit of account” – Bitcoin As An Investment by Yassine Elmandjra, Analyst at ARK Invest.

As the first, and largest cryptocurrency, Bitcoin is often compared to gold. Essentially, Bitcoin could become the new gold, functioning similarly to how gold previously did as the best long term store of value.

Ethereum 

Ethereum is even more fascinating than Bitcoin, namely because it allows for the creation of smart contracts. 

“A ‘smart contract’ is simply a program that runs on the Ethereum blockchain. It’s a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain. … User accounts can then interact with a smart contract by submitting transactions that execute a function defined on the smart contract. Smart contracts can define rules, like a regular contract, and automatically enforce them via the code” – Ethereum.org.

Tether

Tether is currently the third-largest cryptocurrency by market cap. 

“Tether is a blockchain-based cryptocurrency whose cryptocoins in circulation are backed by an equivalent amount of traditional fiat currencies, like the dollar, the euro, or the Japanese yen, which are held in a designated bank account. Tether tokens, the native tokens of the Tether network, trade under the USDT symbol” – Jake Frankenfield, Investopedia. 

Tether has many different uses, but it is mainly used to buy other cryptocurrencies. This makes it easy and faster to buy cryptocurrency than using a debit card, credit card, or some other form of electronic payment. Tether can essentially be used to streamline the crypto buying process. 

Cryptocurrency as an investment

Although I won’t speculate about whether or not Bitcoin’s price will rise, I’d like to mention some of the common arguments for and against cryptocurrency.

Diversification

Say what you will about crypto, but it has been proven to be one of, if not the least correlated asset. This may sound confusing, but all it means is that when the price of stocks, real estate, commodities, etc., changes, crypto will show minimal relation with other assets. This makes it a great way to diversify your investment portfolio.

“Diversification strives to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others. The benefits of diversification hold only if the securities in the portfolio are not perfectly correlated—that is, they respond differently, often in opposing ways, to market influences” – Troy Segal, Investopedia. 

By making cryptocurrency even just a small part of your portfolio (1-5%), you can diversify your portfolio to reduce your risk.

Energy usage 

Its significant energy usage is one of the biggest critiques of cryptocurrencies. 

Although it’s hard to find exact numbers about cryptocurrency’s green energy usage, it has been found that a significant portion is renewable. Either way, cryptocurrencies undeniably use a lot of energy, some more than others. 

But some cryptocurrencies are finding more efficient ways to verify payments that use much less energy. Still, this is a big problem that it’s important to be aware of. 

No central authority 

Perhaps what crypto is most know for is being decentralized. This means that no one person or group makes decisions about or creates the currency. This means you don’t have to trust a third party in order to conduct payments. This was one of the biggest reasons cryptocurrency was created.

Illicit transactions

Another common concern about many cryptocurrencies is that it’s used for illicit transactions. The term “illicit transactions” means money that is illegally transferred or spent. According to a 2021 report from Chainalysis, 2.1% of cryptocurrency’s transactional volume was illicit transactions.

The fact that illicit transactions account for over two percent of cryptocurrency transactions is a concern for many people and could potentially incentivize governments to ban them. This is an important thing to be aware of if you’re planning to invest in crypto.

How to invest in cryptocurrency as a teenager

There are a few different ways you can invest in cryptocurrency as a teenager, but it’s a lot harder than if you were an adult. 

1. Derivative fund 

The first way to invest in cryptocurrency is by far the easiest but also has some downsides.

Essentially, you can invest in funds that invest in cryptocurrency instead of directly owning cryptocurrency yourself. There are two asset managers that offer cryptocurrency. These are Greyscale, and Osprey and they have a few notable differences. 

The two asset managers have funds containing different cryptocurrencies, which have different management fees, and market caps. Although I won’t dive into the nuances of the two, the main difference between the two is that Greyscale is older and more established, with more assets under management. 

The biggest con to investing in derivative funds, besides the substantial management fee, is that the price of a fund is disconnected from the price of the underlying asset.

Even if Bitcoin, for example, went up or down, a Bitcoin fund could respond in the opposite way. This is because the price of a fund – even if it’s a cryptocurrency fund – is dictated by the stock market.

If stock market investors aren’t interested in crypto, even if prices were soaring, a crypto fund could stay the same or drop in price, regardless of the value of the underlying asset. This is because these funds are subject to changing supply and demand in the stock market, on top of the existing changing supply and demand for cryptocurrency.

You can invest in a crypto fund as a kid or teenager by opening a custodial account. 

“The term custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities” – Investopedia.com.

You can open a custodial account with the help of your parents and begin investing in stocks, including cryptocurrency funds. 

2. Transfer 

Another way of investing in cryptocurrency is more difficult, but it will allow you to own crypto directly. 

Although there’s no law against people under the age of 18 – at least in the united states – most cryptocurrency exchanges like Coinbase or Binance don’t allow minors to transact. But you can still send and receive cryptocurrency to a crypto wallet; you just can’t buy it. 

“Crypto wallets keep your private keys – the passwords that give you access to your cryptocurrencies – safe and accessible, allowing you to send and receive cryptocurrencies like Bitcoin and Ethereum” – Coinbase.

So if you know someone who already owns cryptocurrency, you can make a crypto wallet and ask them to purchase and send you cryptocurrency. Then you can pay them an equivalent amount of money in cash. 

This way, you’ll be able to own crypto directly.

Alternatively, if you don’t know anyone who already invests in crypto, you could try to convince one of your parents to open up an account with crypto exchange. However, this can be a time-consuming process, so your parents probably won’t be all that excited about this approach.

3. Other

There are many other ways of buying cryptocurrency as a teenager, but from the research I’ve done, it seems like the methods I mentioned above are the easiest and safest.