By Harvey Joyce
The phrase “money is no object” has never appeared to be more true. The evolution of cryptocurrency in recent years has dramatically changed the financial landscape. But new studies show increasing numbers of students and teenagers are investing in this new currency without a full understanding of its rewards and risks.
A cryptocurrency (or crypto) is a digital currency that, like any currency, can be used to buy goods and services. What distinguishes cryptocurrency is that it uses a digital recording of transactions which is then duplicated and distributed across the entire network of computer systems on the blockchain. In theory, this decentralised blockchain should make it close to impossible to change or cheat the system. This also means crypto is not controlled or regulated by a central authority or administrators, whereas traditional currency is issued by central banks and backed by the government.
One of the most popular cryptocurrencies is Bitcoin. It has been very successful over the past year, reaching over £45,000 per bitcoin in April, with a current market capitalisation of over $850 billion. This success has made Bitcoin very appealing to both younger and older, more experienced audiences.
In recent surveys, from UniHomes and Save the Student, student interest and investment in crypto has grown rapidly in the past year. Around 6% of students are investing in cryptocurrencies and two-thirds of students have considered making such an investment.
The main reason for this increase is the lack of financial stability faced by students in the pandemic. The unstable job market, loss of earnings from parents and low maintenance loans have all caused students to look for other ways to fund university life. Social media sites, such as Instagram and Tiktok, have also highlighted the success of young people investing in crypto by using celebrities endorsements and influencers.
Whilst more students are getting into crypto, many are not properly assessing the risks involved and instead are seeing cryptocurrencies as a quick, novelty way to make cash. First of all, it’s crucial to understand the volatility of cryptocurrencies. Despite Bitcoin’s value rising to over £45,000 in April, it lost nearly half of its value in the following months. Bitcoin’s prices vary wildly compared to traditional currencies that are stable from central banks and governments.
In addition, the digital nature and anonymity of cryptocurrency is also a big risk. Proof of ownership of crypto is limited to private “keys” that are used to authenticate transactions, as names and locations of users are encrypted. This makes cryptocurrencies a prime target for hackers, especially because many young people and small businesses aren’t aware of how to protect this new form of currency.
The future of cryptocurrency seems unclear. On one hand, many big brands, such as Microsoft, are starting to accept payments in the form of bitcoin as the future moves towards digitalisation. Last month, El Salvador became the first country to accept Bitcoin as legal tender, pointing to the currency becoming more mainstream. On the other hand, countries like China and big cooperations are increasing restrictions and regulations on the use of cryptocurrencies.
There are also technological concerns. The processing power of new ‘quantum’ computers has the ability to underpin the tight security of blockchains and crypto. This may lead to problems in the near future as ‘quantum’ computers are set to be operational in the next five to ten years.
Finally, there are environmental issues. The formulation of cryptocurrencies requires large-scale computing networks to perform a multitude of intense calculations. These computations require a massive amount of energy, and experts believe Bitcoin networks use as much energy as entire countries such as Argentina. That is why the general public needs to be made aware of the environmental impact of using cryptocurrencies.
Many financial authorities, like the FCA, are advising young people about the dangers of investing in crypto. People need to be aware of the level of risk involved, whether their transactions are protected and regulated and whether they are receiving advice from trusted sources. That is the best way to create more risk-averse investors.
Illustration: Anna Kuptsova