Why Crypto may be a Good Investment Over the Long-Term for Your Kids
The best quote that sums it up came from MicroStrategy CEO Michael Saylor.
“If you’re going to invest in bitcoin, a short-time horizon is four years, a mid-time horizon is 10 years. The right time horizon is forever,” Saylor told Bloomberg.
Consider what you might have invested in 20, 10 or just five years ago. Do you wish you had invested that stock sooner? (Think investing in Amazon in the late nineties.) Was Bitcoin on your radar in 2011? If you weren’t aware of this asset, which continues to have the potential to be transformative, you might have wished you’d taken the plunge earlier.
Cryptocurrencies are pushing the envelope of technology and investment, so why not get your kids started in the right direction with financial literacy? In this piece, we’ll walk through why you might want to invest in crypto for kids, how to invest in cryptocurrency for your children and how to explain crypto to kids to get them interested in all things related to crypto wallets and digital currency.
Why Invest in Crypto for Kids?
Why should kids get interested in crypto and why should you, as a parent, consider introducing kids to cryptocurrencies?
Explosive Opportunities Abound
The total market capitalization of the crypto sector is now valued at over $2 trillion. The value of a single Bitcoin is now over $44,000. Highly valued cryptocurrencies include Bitcoin (BTC) and Ethereum (ETH). However, some cryptocurrencies are more volatile, so you’ll need to keep an eye out for whether they deserve a place in your child’s portfolio. For example, some other types of cryptocurrencies include:
- USD Coin
- Dogecoin (featuring that famous shiba inu)
Again, carefully evaluate whether you want to invite some of the more volatile types of cryptocurrency into a portfolio earmarked for your child. Altcoins may sound like a good option because they are cheap but they might be even more volatile down the road.
Ease of Investing
If you’re talking about straight investing in popular investments like stocks, bonds and mutual funds, in short, it’s easier to invest than ever before. The days of asking a stockbroker to invest on your behalf have all but vanished. Apps also come with gamified features that appeal to kids. As long as your child can read, they can probably set up a brokerage transaction (or even set up a brokerage account) faster than you can!
If you’re investing in stocks, bonds or mutual funds, you can open custodial accounts for your kids. Their children own the assets but the account is managed by the parent — a common custodial account is the UGMA or UTMA, offered by UNest. You can also join UNest’s waitlist and get $10 deposited to your UNest account. You’ll also automatically enter into our weekly Ethereum giveaways.
The magic of compounding is right at your child’s tiny fingertips. It’s fun to explain compounding to a child. Using a pile of pennies, explain to your child that for every ten seconds, you’ll give them five pennies by just holding onto the money. After a minute, add six pennies to the pile. Continue to add pennies increments just by holding onto the money — but they need to hold their money in their “account.” After several repetitions, the idea of compounding will become clear, especially if you allow them to count their pennies at the end of however long you choose to do the exercise.
Kids have the most time on their side, which means compounding will go further for a child. A child can invest $50 every month and have over $750,000 in 60 years with an 8% interest rate.
You and your child can now study stocks, bonds, mutual funds and cryptocurrency in depth using tools on multiple types of platforms. You can find the right tool for your investing needs just about anywhere. In addition, many platforms offer up-to-the minute market reporting.
How Can Crypto Fit into Your Child’s Portfolio?
You may be nervous about adding crypto to your portfolio because of its volatile nature. Cryptocurrency does not have any indices to show how volatile it is (unlike stocks), but you only have to take a quick look at historical price charts to see the extremes in crypto prices. Bitcoin rose by 125% in 2016 and rose again by more than 2,000% in 2017, but then it plummeted. In 2021, Bitcoin set more highs.
How do you get around this type of volatility? You may also want to consider the makeup of your portfolio to ensure balance.
For example, you may want to consider the following factors: time horizon, risk tolerance and diversification. Let’s go over these definitions:
- Time horizon: Time horizon means the time period in which an investor plans to gain value on an investment. Your time horizon can range from a few years to several decades. Since crypto is more volatile than other assets, you may want to consider keeping crypto investments in your child’s portfolio for a lengthier time period compared to traditional investments like stocks and bonds.
- Risk tolerance: How well can you stomach volatility? Can you withstand losing money in the interim if you predict higher returns later on? Risk tolerance is the degree of variability in investment returns that you can withstand and it is an important component in investing.
- Diversification: Diversifying your investments means investing in multiple assets so your exposure to just one asset is limited. This helps reduce the volatility of your investments and overall portfolio over time.
Considering these factors can help you determine how much cryptocurrency you may want to put into your child’s portfolio.
How to Invest in Crypto for Kids
Kids can’t directly buy cryptocurrencies, and that’s the main hurdle of investing in cryptocurrencies for kids. Popular sites like Coinbase and Paypal require you to be at least 18 before you’re allowed to buy or sell crypto.
As you can see, it’s up to you to buy cryptocurrencies for your child in a few simple steps:
- Decide where to buy cryptocurrency. You can tap into cryptocurrency exchanges like Coinbase or with a traditional brokerage to get started investing in cryptocurrencies. UNest will also allow you to set up an UGMA or UTMA custodial account on your child’s behalf and create a digital wallet for the child or give them a hardware wallet. When you name your child as a beneficiary, the account contents become the legal property of your child. However, your child cannot take the money out until they turn what’s called the “age of majority” in your state — it’s usually 18 or 21.
- Pick a place to store your cryptocurrency. You can put your cryptocurrency into a hot wallet or cold wallet Bitcoin can be stored in two kinds of digital wallets: a hot wallet or a cold wallet. Transactions initiate faster with a hot wallet, while a cold wallet usually adds in extra security steps that take a little bit longer. Examples of hot wallets: Coinbase, Electrum. Examples of cold wallets: Trezor, Ledger Nano.
- Purchase your cryptocurrency. Next, deposit traditional currencies into your account to purchase digital money. You may not want to sink all of your assets into a cryptocurrency investment. However, the fact of the matter is that Bitcoin costs over $48,000, so you could spend a fortune. However, it’s possible to buy fractional shares.
- Keep an eye on your investment. It’s likely that you want to keep your cryptocurrency for the long haul as an investment for your child. You can hold onto the investment until your child can open up their own digital wallet, in which you can transfer everything in your digital wallet to them when they turn 18. Just keep track of those login credentials and the digital wallet over time!
How to Explain Crypto to Kids
It might be hard for a child to turn over money in their piggy bank if they can’t visually see how investing in cryptocurrency might benefit them later on.
So, what’s the best way to talk to kids about how crypto works, especially when crypto coins are totally digital and stored on computers? Unlike money, you can’t see or touch them, which makes it hard to describe the fundamentals of cryptocurrencies.
However, here’s how you could spin it. Start by saying, “Let’s say you have a piece of art.” (Maybe describe how colorful the artwork is or draw a picture for your child.)
Tell your child a story about the artwork. “If I give it to you, it’s not mine anymore. You don’t have to worry about me giving it to anyone else because I gave the artwork to you. You’re the only one who has it and you can make decisions about what to do with this fabulous piece of art. You can do whatever you want with it — sell it, keep it or hang it up in your bedroom.”
“Now, what if I have an email that has a copy of that artwork attached to it? How can you be sure that I actually own that image? How do you know if people all over the world aren’t forwarding the picture of the image and printing it out on computer paper — in the United States, China, Australia — everywhere? If I email you the artwork, how can you be 100% sure that I haven’t sent it to 100 people before you, and they forwarded the email to another 100 people?”
You can explain how blockchain prevents that from happening because you can trust the blockchain technology. Putting digital money on a blockchain allows you to send assets to anyone on the planet without using a bank or using your personal information.
Then, to make cryptocurrency even more relatable, make sure you help your kids understand that they can use crypto to buy things. Many companies have been accepting cryptocurrencies as payment, particularly Bitcoin. For example, Microsoft, Overstock, Home Depot, Namecheap, Starbucks and even Wikipedia accept cryptocurrency as payment, just like you’d use a credit card.
Can Your Child Invest in Crypto Now?
Ultimately, your child will need your help investing in crypto if they are younger than 18.
However, you can purchase crypto and store it for your child, then pass that wallet onto your kid with your security credentials. Your child can use it as a form of digital legacy and inheritance when they turn 18.
Still on the fence about cryptocurrency? If you’re not sure how to get started or nervous about the volatility inherent in certain types of cryptocurrencies, you may want to consider investing in stocks, bonds, mutual funds through an UTMA or UGMA.
Tap into UNest for more information about various investment options.