While personal finance has long been part of the curriculum, a more recent development in money’s form has prompted calls for a further subject to be added. The advent of cryptocurrency has brought new investment opportunities and potential pitfalls. Young people spending much of their time on screens may engage with its online-only presence, but they must also be warned against internet investment experts promising them a route to easy riches.
What is a cryptocurrency?
Cryptocurrencies are a category of virtual currency. The term ‘virtual currencies’ used alone refers to any currencies which exist solely in electronic form, having no official physical form. A virtual currency is defined by the Financial Action Task Force (2015) as, “A digital representation of value that can be digitally traded and functions as a medium of exchange and/or a unit of account and/or a store of value, but does not have legal tender status. It is not issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency.”
(Definition provided by The University of the West of England’s Dr Henry Hillman)
Read beyond the headline
Children must become sceptical of eye-catching headlines creating a misleading impression of riskless and effortless reward.
Dr Henry Hillman, senior lecturer at the University of West of England (UWE) in Bristol, said, “If it sounds too good to be true, it is too good to be true.”
A brief search of news articles concerning Bitcoin will invariably produce a handful of stories of people who have made a fortune through cryptocurrencies and stories of lost hard drives with millions of pounds of Bitcoin on them.
Those choosing to invest should follow the same advice as that for traditional investments: only invest what you’re prepared to lose and spread your risks across different cryptocurrencies and other safer options.
Young people must also be wary of online advisors, believes Dr Hillman. A 2017 Ofcom report found that while 47% of adults mainly got their news from social media posts, compared to 69% of 16–24-year-olds.
A 2019 report by the Financial Conduct Authority found that, “Respondents’ engagement with crypto-assets was often prompted by the advice of surprisingly few but inordinately influential recommendations.”
Trusting in the advice of an influential source rather than traditional news sources could easily expose individuals to biased opinions promoting all the benefits of cryptocurrencies but not mentioning their risks.
Professor William Knottenbelt, director of the Centre for Cryptocurrency Research and Engineering, Imperial College London (ICL), believes, like any new technology, cryptocurrency has positives and negatives and while it’s necessary to warn children of its drawbacks, it’s just as important to inform them of its opportunities.
Indeed, cryptocurrency has been one of the best-performing assets over the past decade. “The headline everyone knows is the price of a Bitcoin has gone from less than US$1 in 2010 to around US$60,000 today,” said Professor Knottenbelt.
In the same period, however, many other cryptocurrencies have seen negligible returns or have even failed entirely.
Don’t get conned
Cryptocurrencies are notoriously volatile, high-risk investments with price collapses of 85% or more common.
Non-experts must be alert to a proliferation of scammers in the cryptocurrency field, with fake brokers, so-called ‘crypto advisers’, shady exchanges and unreliable apps looking to exploit people’s naivety and greed. Skills must be acquired to distinguish between genuine projects and platforms with high potential of scamming – Jamie Barlett’s expose on the OneCoin scam is particularly fascinating.
The process of producing new cryptocurrency (known as mining) can be energy-intensive (albeit, much energy used is renewable) and can lead to shortages of certain components, such as graphics cards.
Network congestion can lead to transaction delays, sometimes for days, with transaction fees rising to unsustainable levels.
Moreover, cryptocurrency transactions are usually irreversible, even if the buyer is unsatisfied with the goods or services received.
Beware a crash
Crypto-trading comes with the same risks as traditional trading, plus a few more. The risk of cyber-attack is heightened because, in most cases, cryptocurrency theft cannot be mitigated with third-party insurance.
The risk of technological failure also increases, with many of the cutting-edge trading solutions implemented in crypto relying on smart contracts and algorithmic incentives that haven’t been proof-tested over extended periods of time.
All or nothing
The propensity for online commentators, Twitter users and YouTube posters to fall 100% for or against Bitcoin is a concern for Dr Andrew Urquhart, associate professor of finance of the ICMA Centre at Henley Business School. “There are very few balanced articles out there which is a real worry for investors learning about this area.”
His teaching is to explain the benefits of cryptos and blockchain (a growing list of records, known as blocks, hence ‘blockchain’) technology but to also outline clearly the risks involved. In particular, investors need to realise the fundamental value of any cryptocurrency is zero.
“With the large volatility involved, investors can lose 20% in one day, so it isn’t for the faint-hearted.”
Dr Urquhart also makes it clear that some cryptocurrencies are scams and Ponzi schemes (a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors).
Just as notes and coins are stored in vaults in the real world, investors in cryptocurrency must keep their assets safe. “Security risks are real,” said Dr Urquhart, “exchanges can be hacked and there are lots of examples of this.”
Investors should do their homework and once they buy cryptos off an exchange, they should transfer them to an online wallet or a popular offline hard wallet like Trezor or Ledger.
Investors must also look after such devices and ensure they are not lost.
Scarcity is good
That money supply in cryptocurrencies can be limited, producing scarce assets which are expensive to produce, leads to some cryptocurrencies being regarded as ‘hard money’, like gold.
“By contrast, money supply of traditional flat currencies like pounds, euros and dollars is potentially unlimited and is vulnerable to common bouts of quantitative easing,” said Professor Knottenbelt, meaning traditional flat currencies are regarded as ‘soft money’.
Moreover, Professor Knottenbelt points out the promise written on UK bank notes to pay the bearer the sum of, say, £20, no longer assures them the corresponding weight of precious metal, as once was the case.
There are several other positives to cryptocurrency, according to the professor.
Smart contracts allow money to be ‘programmable’, so many time-consuming paper-based processes can be automated efficiently. This is transforming industries – such as insurance.
Self-custody allows for sophisticated users to directly control their assets rather than use an intermediary, which can be more efficient and lead to lower fees.
Cryptocurrencies and cryptocurrency services tend to operate 24-hours a day, 365 days a year, meaning markets are always open.
Gain an understanding
Inasmuch as cryptocurrency is technology, and one needs to understand how it works before investing, investing in it is no different to doing so in AI startups, according to Jeane-Philippe Vergne, University College London (UCL) associate professor.
“The biggest risk is to describe cryptocurrency as some sort of gambling game,” said Professor Vergne, “when in fact it is a nascent industry consisting of hundreds of new ventures taking substantial risks to develop new technology,” as Vergne’s colleague and he demonstrated in this article.
See the big picture
With a few exceptions, Professor Vergne’s experience is that schools do not teach investment, let alone cryptocurrency, adequately. He believes if society decides it’s important for all to understand investment, the fundamentals must be gained. This includes areas such as compound interest, the risk/return relationship, differences between asset classes like equity, debt, commodities, real estate and cryptocurrency, the importance of diversification, trading fees and the basics of income versus capital gains taxation. “There’s nothing fundamentally different with crypto when one considers the big picture of investing to build personal savings over time.”
With governments worldwide launching large stimulus packages to stimulate their economies, the expectation is for higher inflation which will devalue currencies. “Investors are looking at cryptos as a store of value,” said Dr Urquhart.
“There will only ever be 21 million Bitcoins created, so we know for certain how much of the total supply of Bitcoin we own.”
Bitcoin currently having no inflation is one of its major advantages.
Back to basics
When it comes to educating young people in cryptocurrency, online investing and trading, Dr Urquhart recommends teachers start with the background and why cryptos came about and explain not just their importance, but also the blockchain technology behind them, investigating what problems they solve.
Schools should spell out the risks involved and compare them to traditional assets.
In teaching, there should be no investment advice but a balanced, well-thought-out viewpoint on the crypto ecosystem and how it works.
Providing quality crypto education
Meaningful education in cryptocurrencies will equip children with the knowledge to make their own choices regarding investing in them.
Fear of the unknown may be partly behind the knee-jerk concern with which some view cryptocurrencies, but even the currencies traditionally held in wallets and purses in the form of notes and coins can be proven to have their drawbacks.
Teachers should look out for another fear – the fear of missing out (FOMO) – in those they educate; young adults may be tempted to invest in virtual currencies if they mistakenly think their peers are getting rich with little effort.
However the subject is taught, teachers must beware of challenges to their tuition from self-appointed online influencers who may undo their good work.