As an investment opportunity in the recent years, the popularity of cryptocurrencies has scaled new heights. In the cryptocurrency systems, the reliance is on blockchain technology, which transfers cryptocurrency among investors and records transactions as well.
The word currency is included in cryptocurrencies. Still, the operation of cryptocurrencies bears more similarity to other instruments as compared to currencies. While cryptocurrencies are not considered legal tender, they are not widely accepted as well.
Cryptocurrencies are associated with some risks that are important to understand before investing in them.
Cryptocurrency is one of the types of virtual currencies wherein blockchain technology records the transactions and cryptography secures the value. The origin of cryptocurrencies lies in the birth of bitcoin, an event that took place in 2009.
By market capitalization, Bitcoin is the most popular cryptocurrency to date. CoinMarketCap specifies that there are over 20,000 cryptocurrencies currently present in the market.
Cryptocurrencies are decentralized, which means that the government does not regulate them the same way it regulates securities and cryptocurrencies. The decentralized nature of cryptocurrencies makes it appealing to a host of investors, but ups the risk factor as well, associated with investing in cryptocurrencies.
Making cryptocurrency investments
One invests in cryptocurrencies in the same way as one invests in any other security, which may be a bond or a stock. It is like; you invest in a crypto coin and hope that its value increases over time.
To buy or sell cryptocurrencies, one frequents the centralized cryptocurrency exchanges. On some cryptocurrency exchanges, one can trade one’s fiat currency, which could be U.S. dollars for cryptocurrency.
Similarly, there are some exchanges wherein one can trade one cryptocurrency for the other. So, when one already has a Bitcoin, the bitcoin may be leveraged for purchasing Etherium, which is another cryptocurrency still.
Owning a cryptocurrency wallet is again a must for buying cryptocurrencies. In the wallet would be the information that renders access to your cryptocurrencies. Further, owning a cryptocurrency wallet is a must for making crypto transactions.
Investing in cryptocurrencies as a teenager
For owning cryptocurrencies, there is no legal minimum age. This goes to show that teenagers can start investing in cryptocurrencies, irrespective of their age.
But, when we consider the case of the most popular cryptocurrency exchanges, which include the traditional brokerage firms, then anyone below the age of 18 is not allowed to invest in cryptocurrencies.
A teenager may find it difficult to invest in cryptocurrencies, but it is not illegal. Peer-to-peer buying is one way a teenager can be involved with cryptocurrencies. They may alternately invest in cryptocurrencies via a decentralized exchange which does not come include KYC requirements.
Another noteworthy point in this regard is that parents can buy cryptocurrencies for their children as custodians. This will be via a Custodian account, which is one of the types of brokerage accounts.
Herein, the custodian can buy and sell securities on the behalf of his child. When the child reaches adulthood, the assets are transferred to him.
It is then noteworthy that among custodian accounts, the ones that hold assets like stocks are more common.
Knowing the risks associated with cryptocurrency investment is also important
When you invest in cryptocurrencies or invest on your teen’s behalf, recognizing the potential crypto investment risks is important. Investments of any nature come with certain risks. But a few of these risks are more prevalent in the case of cryptocurrencies.
- Price Volatility
Price swings take place in all types of investments, but in the case of cryptocurrencies, the price swings are more dramatic. In the 90-day period from April to July 2022 the price of bitcoin fell by $40,000 to hit a low of below $18,000.
- Highly Speculative
Price fluctuations in the case of cryptocurrencies come by as arbitrary. They are not always subject to a company’s performance, as is in the case of stocks. This makes making assumptions on future success difficult.
- Regulatory Uncertainty
The regulation of cryptocurrencies is not necessarily conducted in the same way as the regulation of other financial assets. Securities and Exchange Commission (SEC) treats Bitcoin as a commodity and does not regulate investment in Bitcoin. But, it does have jurisdiction over ETFs, funds, which are the other investment products that invest in cryptocurrencies.
It should also be noted that even as Bitcoin has been defined as a commodity, not all cryptocurrencies are. In SEC’s opinion, several cryptocurrencies sold via initial coin offerings need to be registered with it.
Just like there is insufficient clear regulation for cryptocurrencies, there is a lack of regulation for cryptocurrency exchanges as well. It is a must for brokerage firms and exchange where one buys stocks to meet some regulatory standards. But this is not the case for cryptocurrency trading platforms.
- Risk of Fraud
Scams and frauds are found in all cryptocurrency markets. But in the case of cryptocurrency, they are even more prevalent. With insufficient regulation in crypto space, the odds of occurrence of fraud become greater still. Taking a look at red flags delivers the odds of occurrence of fraud.
- Insufficient insurance
For recovering your resources, no recourse prevails in case the cryptocurrency exchange holding your asset goes out of business or the assets instantly disappear from your trading account.
Alternatives to cryptocurrency investments that you may choose
Beyond cryptocurrencies, the three primary options for investing for your teen are cash, bonds, and stocks.
Stocks, called equities let an investor to buy a share of ownership in a corporation.
Bonds are debt securities and their market capitalization makes them popular. They are known to provide a good interest income. This interest income may be reinvested in other assets as well.
Taxing in cryptocurrencies
For tax purposescryptocurrencies are treated like property. In case you sell a cryptocurrency for a higher price than you sold it for, the transaction may be subject to capital gains taxes. Taxes may similarly be incurred for using cryptocurrencies to pay for services and goods.
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