This week, due to high demand, we held a bonus session as part of our CPD-accredited webinar series for staff. The focus for this one was how staff can best support students with the financial risk of cryptocurrency.
Starting with the basics of what crypto is and how it can be bought, Vivi also covered:
- Why young people are attracted to cryptocurrency
- How students are trying to make money from crypto
- The dangers for students
- How staff can spot crypto trading in a bank statement
- How staff can support students to use cryptocurrency safely
Here’s a summary, plus the link to Vivi’s slides and the recording of the full session.
What is cryptocurrency?
At a very basic level, cryptocurrency is an internet-based medium of exchange. In other words, it’s a type of digital money that you can trade.
It’s decentralised, which means it’s not run by a central authority. It operates on a peer-to-peer network instead.
Records of cryptocurrency ownership and transactions rely on blockchain technology. Blockchain is simply a secure, public ledger and it’s the operating system on which crypto sits.
As well as being decentralised and secure, cryptocurrency is private – all transactions are publicly recorded but the traders themselves are not and remain anonymous. It’s for this reason that cryptocurrency’s origins lie in the trading of weapons, drugs etc.
The language of cryptocurrency
Getting to grips with all the lingo can be one of the biggest challenges in understanding cryptocurrency!
In a nutshell, ‘cryptocurrency’ is the overarching terminology for all cryptocurrencies. There’s then lots of different names for the many types of cryptocurrencies – like Bitcoin, Dogecoin and Ethereum.
To compare it to something we all understand, ‘cryptocurrency’ is like ‘mobile phone’, while Bitcoin, Dogecoin and Ethereum are like Apple, Samsung and Google – they’re different types of mobile phones.
Types of cryptocurrency
There are thousands of different types of cryptocurrencies. Here’s the most popular ones, which account for approx 85% of crypto between them:
- Binance Coin
How can you get cryptocurrency?
There are two ways to get crypto:
- You can buy/sell and trade crypto, just like other assets
- You can ‘mine’ it – by solving complex mathematical equations, earning a coin/portion of a coin if the answer is correct. These equations require an inordinate amount of computer power and electricity!
Using Bitcoin as an example, it cannot simply be created – it must be ‘mined’ via computational means. There’s only a total of 21m Bitcoins that will ever be in circulation and as of February 24th 2021, 18.639m Bitcoins have already been mined. So there are 2.362m yet to be introduced into circulation.
This is significant because it means Bitcoin won’t be affected by inflation; since there’s a limited supply it will hold its value. It’s for this reason that many believe cryptocurrency has a future and the potential to revolutionise finance.
Why does crypto attract young people?
We’ve seen a high number of cryptocurrency-related entries from students to our monthly Money Confessions campaign. Including:
- “I spend 80% of my wages on crypto every week.”
- “I spent all of my money on Crypto.”
- “I invested in coinbase when it IPO-ed and the share price tanked.”
- “I’ve lost money on crypto.”
- “I couldn’t understand crypto any less if I tried.”
So there’s no doubt that cryptocurrency is increasing in popularity among students, but why are they so keen?
Traditional assets feel unattainable
Acquiring traditional assets feels out of reach for many young people. The dream of owning their own house feels like just that – a dream, and something that’s unachievable thanks to rapidly growing house prices and high rent costs making it difficult to save a deposit.
For those who feel this way, it can be tempting to look to other ways to make money – like crypto.
It’s seen as a way to ‘beat the system’
For some young people, cryptocurrency can be seen as a way to beat the system, feeding into a lack of faith in existing financial paradigms. Crypto is considered a rebellion against more traditional trading and investing.
In fact, 27% of those aged 18-34 prefer Bitcoin over stocks.
FOMO, thrill and status
Oftentimes, FOMO (fear of missing out) can drive young people to get involved with cryptocurrency. So too can chasing ‘thrill’ and ‘status’, says the Financial Conduct Authority. This is only fuelled by tales of others making money through crypto.
It’s easily accessible
It can take just a matter of minutes to sign up for an account and start buying and selling cryptocurrency.
So it’s not surprising that more and more students have been attracted to crypto over the last year – sitting at home during lockdown, with not much to do, few part-time jobs available and instant access to cryptocurrency.
How are students trying to make money from cryptocurrency?
Cryptocurrency is an ‘asset’ and just like any other asset, it’s listed on exchanges according to supply and demand. It can be bought and sold.
There are three main ways students try to make money from crypto:
- Buy and hold – cryptocurrency is bought at a price and held (riding the rollercoaster) until prices have risen enough to make a good return, it’s then sold and the student cashes out
- Shorting – investing so profit will be made if the price falls, which is particularly risky because if the price goes up instead of down, you can lose more than you invested (think back to what happened with Reddit and GameStop in January 2021!)
- Fast trading – frequently trading to take advantage of short-term price movements
What are the dangers of cryptocurrency for students?
Volatility and the potential to lose big
The first major financial risk around cryptocurrency is volatility. Digital currencies are highly speculative, very high-risk investments, since you can easily lose all of your money.
This is because crypto has no intrinsic value; it holds no actual value itself, relying entirely on supply and demand and the mood of those who want to hold it.
This graph from the Bank of England shows just how volatile the value of cryptocurrency is. Watch the session recording for more on this – Vivi shows a live cryptocurrency exchange.
What’s worrying is that 59% of those investing admit they may not have the means to withstand a significant financial loss. “I’ll either be rich, or wrong,” was the answer of one young person when he was asked by the Financial Times why he’s putting all his money into Bitcoin.
This is what can make cryptocurrency particularly risky for students. We’ve heard from some about how they’ve spent the majority of their student loan on cryptocurrency, then the value has fallen and they’ve been unable to afford to support themselves for the rest of the term, with no means of regular income.
“I invested in crypto when it crashed and now I’m worried it won’t go back up.”
Lack of regulation and protection
The cryptocurrency sector is unregulated. The only exception is for money laundering purposes in the UK, but there’s no regulation around how crypto is run, sold and exchanged.
So if something goes wrong – say a student invests in cryptocurrency that turns out to be a scam (and those a rife!), it’s unlikely the FSCS will be able to help.
Cryptocurrency has been banned by governments around the world and regulatory bodies like the FCA have also made it clear they’re not fans. Since it’s unregulated, there’s no way of knowing what would happen to individuals’ investments if crypto was banned in the UK tomorrow.
Market manipulation, fake endorsements and scams
Another issue with cryptocurrency is that its prices are extremely vulnerable to market manipulation and those trying to artificially influence the cost. You’ve probably heard of Elon Musk doing just this – one tweet from Elon about Bitcoin or Dogecoin can send costs climbing or falling by 20-30%!
There have also been fake celebrity endorsements for crypto on social media, plus many bogus exchanges and instances of people who have fallen victim to scams, including phishing scams designed to steal the keys to cryptocurrency digital wallets.
Hard to spend
Very few sellers will accept cryptocurrency as payment and those that do can change their mind overnight. The volatility of its value also makes it risky to purchase real life goods with cryptocurrency – for example, one of the first miners of Bitcoin bought a pizza for 10,000 Bitcoins… which would today be worth around 300m. That’s one expensive meal!
Not so much a danger for students but another problem with cryptocurrency is that it has an enormous carbon footprint and is terrible for the environment.
Spotting crypto trading in a bank statement
Like all trading and most investment activity, cryptocurrency is bought and sold through an app – to which funds need to be transferred.
The most common cryptocurrency trading apps are:
These are some of the names that could appear on a bank statement.
How can staff support students to use cryptocurrency safely?
It’s really the blurred line between gambling and investing that makes cryptocurrency so confounding. It’s still hard at this stage to understand whether people are investing or gambling.
But what is clear is that cryptocurrency is here to stay and it’s unlikely young people will stop using it, so it’s important staff know how to support students to use it safely.
In conversations about crypto, it’s a good idea for staff to suggest that students:
- Research! Making sure to understand how it all works before spending any money
- Learn how to store digital currency safely and recognise a scammer
- Are aware of additional fees including:
- Transaction fees
- Deposit fees
- Withdrawal fees
- Trading fees
- Escrow fees
- Diversify their investments to spread the risk – so not spending all their money on cryptocurrency, perhaps also putting some in a stocks and shares ISA (for example)
- Understand their risk tolerance and don’t get involved if they are risk averse
- Prepare for volatility and make sure they can withstand a loss
- Be wary of shorting and fast trading (and ideally avoid doing either of these)
- Sign up for a free Blackbullion account to access our cryptocurrency-focused learning content and resources
Cryptocurrency is hugely volatile, unregulated and super risky.
There are also a lot of people (seemingly) making a lot of money so FOMO is high, especially among young people, and crypto is not going away.
The best thing we can do to support students is to help them understand the risks, the dangers and the downside so that they can make an informed decision.
Watch the recording
This session was part three of our 6-part series for university and college staff, all about how to support students with activities that carry financial risk. Check out all upcoming sessions and register your free place now. The series has been CPD accredited – simply attend at least 4 of the 6 sessions to get your certificate.
And don’t forget to sign up to our staff email newsletter to be first to find out about upcoming staff webinars and get free financial wellbeing resources to share with students.