Simple Money Tips for Teens Volume II; CryptoCAUTION
Posted on November 17, 2022
*** Disclaimer – please do not invest in anything without intimate knowledge. Do your homework and/or consult with professionals!
If you’ve ever heard the phrase “too good to be true”, you can relate it to the cryptocurrency space. Especially after this week.
This past week, Sam Bankman-Fried’s crypto exchange ‘FTX’ filed for bankruptcy. Yes, the same company that had Tom Brady on the TV firing a flamethrower is insolvent. The company that had Gisele, Steph, the whole gang as equity stakeholders and spokespeople…. broke.
What happened to FTX? The same thing that happened to Voyager. The same thing that happened to Celsius. Picture a relationship. Two people get married real quickly after meeting, there’s a honeymoon, then a phase of ‘umm why did I marry this person we barely get along’, followed by a desire to get out. Well – these crypto exchanges are a microcosm of that. People poured money into this space not really understanding it; they just saw all these people making crazy bank off it. They got married too soon. Then when people realized they couldn’t get rich overnight and rumours spread about a multi-billion dollar selloff of FTX’s tokens by a crypto whale, they started wanting their money back…. and the exchanges didn’t have the money to pay ’em all. ‘Too good to be true’.
Here are some valuable pieces of information that you should take heed of before logging into Coinbase and depositing your hard-earned money into stablecoins…
*** Cryptocurrency – my personal definition – is ‘a digital asset with absolutely nothing behind it’. Crypto is NOT money because it cannot be used as a means of compensation for goods and services in Canada or the USA. Crypto is NOT legal tender. You cannot walk into a store and say ‘yeah I’d like to pay with Bitcoin’. With something like a share of a company for example – you can’t physically touch it, you can’t buy things with it, but it is essentially a small piece of a company which has properties, plants, equipment, money, people, etc etc. Crypto is an asset – like gold – that derives its value from things such as scarcity (Bitcoin is limited to 23 million coins because of its algorithm, which makes it scarce).
*** Crypto stands for cryptography, which is a form of coding that protects transmitted information so that only the sender and person who receives the information can see it.
*** Cryptocurrency’s M.O is decentralization – which means that you don’t need a middleman. In any traditional banking transaction (say, an e-transfer), the money that you are sending to someone goes through a centralized bank (one of the big ones like TD, RBC, CIBC. etc). The bank approves or denies the transaction. In the crypto world, there is no middleman.
*** Since governments and banks are like, homies/best friends/chums – cryptocurrency may never be properly regulated. Because the government wants to control everything, and a monetary system that they cannot control is really ambitious. True crypto OG’s like the creator of Binance will never agree to having ties with government – power to the people, man (peace sign).
*** Since banks don’t hold cryptocurrency on their balance sheets (haven’t bought into it), most entities who own cryptocurrency are humans. Retail investors if you will. Humans are emotional. That’s why you see huge swings in the price of Bitcoin, Ethereum, Solana, and coins you’ve probably never heard of. The fancy term for huge price swings is ‘volatility’. Volatility is risky. One day you could be up tens of thousands… the next day, $0 (this is pretty much what happened with FTX’s token called ‘FTT’).
Only invest in cryptocurrency if you….
*** Are OK with taking on large amounts of risk. If you hold $1 million dollars worth of Bitcoin on an exchange (not in a crypto wallet, there’s a difference) and that exchange goes bankrupt, you’re out a million bucks. There’s no one there to save you either – these exchanges are NOT regulated by the securities and exchange commission aka ‘the stock market police’. There’s no financial statements where you can go ‘oh sh*t, this exchange is $10 billion dollars in debt’ and get out before you lose everything. There is no FDIC insurance in the crypto universe (if a bank fails, the FDIC insures deposits).
*** Understand the crypto space. If everything I have said about crypto above is like Japanese to you, then I would suggest avoiding this investment option altogether.
*** Understand that you should only invest what you are comfortable with losing, and always remember to diversify your investment portfolio (meaning – spread out your investment dollars into assets that you understand, but spread it out in a way where if one asset class tanks, you don’t have ‘all your eggs in one basket’ so to speak).
*** Learn as much as you can about decentralized crypto wallets and store your crypto in there. That way, if these exchanges continue to fall – you won’t lose all your coins.
Click to see my last Money Tips article here
Until next time