11

Background

I have a family friend with two kids. When the kids were 1 I bought them shares of stock that were transferred into a UTMA for them, figuring they had enough toys and wouldn't remember another, and 20 years of appreciation would make this a really cool gift as they grew towards adulthood. This was a bigger hit with the kids as they grew than I expected (probably owing partly to their first gift being shares of TSLA that I bought for $35ish), and turned into a bit of a tradition.

I usually swing back and forth between high risk 'fun' stuff and lower risk 'investment' stocks. This is not just to give them big swings to be excited about, and possibly big gains to enjoy, but also to help them internalize the concept of risk and understand its role in investing (and why you can't just load up on high-risk stuff). This year is a high risk year, and I decided to buy them GBTC; a bitcoin trust.

Explaining Bitcoin

Tesla was easy. They knew what a car was and could easily understand a car that doesn't need gas. Then it led into a fun conversation about tradeoffs (cost, can't fill up at a station, etc), environment, green energy, etc. This was helped by the fact that I followed Tesla from the start and understood their product and technology very well.

They're inquisitive kids. They will ask what this stock is, I'm sure.

Bitcoin is something I have a tentative grasp of, but I'm not going to pretend I understand it well, and it's always hard to explain something that your understanding is limited in. I also need to put this in terms that an 8 year old and an 10 year old will understand.

Initial Thoughts

My first thought was to talk about the history of 'money'. Talk about how long ago people would often barter, and the problems with valuation and exchanges within groups. Then talk about how gold/food became a standardized medium of exchange in ancient civilizations owing their use-value to scarcity. Then talk about our modern fiat money and how it's backed not so much by an object of value anymore but by a promise from a governing body. Then lead into digital currencies.

This feels too verbose; we can certainly dive into things after they have a basic understanding but I think they need something more succinct to dig their teeth into at first. Also, I'm also not sure what the important differences are with cryptocurrency and what really gives it value. I understand some technical details, but I don't think they will be of much value in this sort of conversation.

Goal

I want to explain in as interesting and fun a way what Bitcoin is, while also communicating what important attributes make it different than traditional currencies, in a way easily digestible to a curious and intelligent 8/10 year old.

8
  • Do they play any video games with ingame currencies and trading between players? When they are, they should be familiar with the concept of virtual currencies and virtual barter, which is something you could build on.
    – Philipp
    Mar 19 at 14:58
  • 12
    "Also, I'm also not sure what the important differences are with cryptocurrency and what really gives it value." This is probably a sign that you have more belief in Crypto due to optimism, rather than understanding. To explain something properly, you must first understand it yourself. Mar 19 at 15:15
  • @Grade'Eh'Bacon Yes, that was exactly the concept I was clumsily trying to communicate. Usually I wouldn't invest in something I don't understand, but it seemed fun, and was only $35ish.
    – Nicholas
    Mar 19 at 16:46
  • 4
    "Another scheme cooked up by adults where some people make money and most people lose money. Lots of people participate because everyone thinks they are in the first group, despite logic telling us that most people will end up in the second group."
    – Tom
    Mar 20 at 8:33
  • 1
    Best description I've read: twitter.com/Theophite/status/1030225104234373121 "imagine if keeping your car idling 24/7 produced solved Sudokus you could trade for heroin". Mar 20 at 10:15
25

I think the best way to explain it would be step by step, building from concepts that can be explained in more practical terms that she might understand. You may feel the below is overly harsh, but at bear minimum, think of it like this: If you can't articulate why I am wrong about the below [and while the below is quite opinionated, these are indeed opinions that I hold], you may not be ready to explain it to a child, and further to the point, you may be in over your head yourself.

  1. I would start by explaining the Dutch tulip crash of 1637 - nice introduction to the idea of how something can seem like it makes immediate practicable sense, but that market frenzy can turn something possibly profitable into something that no longer bears relation to the underlying asset.

  2. Then I would go into the South Sea Bubble of 1720 [nice little segue here into how even a genius like Sir Isaac Newton can make emotional decisions without understanding the underlying financial reality]. This is all just setting the stage for the idea that a market can remain irrational longer than you can remain solvent, meaning that prices often do get detached from the underlying reality of value, and that she shouldn't worry, prices do normalize eventually.

  3. You could discuss how a barter economy led to minted coins, which then became the backing for national currencies, and then how, quite naturally, the gold standard became irrelevant to the underlying economy, allowing countries to print money by fiat, still holding value on the basis of that government's own projected stability and ability to collect taxes, thus leaving no need for non-governmental, non-asset backed currencies like Bitcoin.

  4. You should then discuss trivial cryptography concepts, and show how hashing with private and public keys can prove identity, which through a simplistic blockchain explanation can be used to assign a chain of ownership to specifically minted 'coins'. You could sideline here to discuss how the Markov chain allows for some really remarkable concepts with proven value, primarily using Github as an example of the proof of authorship and unchanged-ness of published code.

  5. You would then need to dive into how turning a Markov chain into a public blockchain requires currency to motivate miners to waste power cycles [and by extension, waste precious natural resources to do this] to keep the blockchain from being overrun with a 50%+ attack that would threaten the very foundation of Bitcoin if mining conglomerates ever merged at greater numbers than they already have.

  6. You could discuss the risk of irreversible transactions. You may feel that trustless = good, but you might want to discuss that with her parents first, something like "hey, I'd like to teach your daughter that no institution can be trusted, that all power is a lie, and that in reality if she has a problem there is always a risk that no one will help her, not her bank, her government, or anyone with power, and that the only good force in the world we can believe in is the Good of Greed that will ensure miners always act in their own self interest." They may not feel this to be an appropriate lesson for a 9 year old, of course.

  7. You could tell her that Visa processes about 7,000 transactions / second globally, but the blockchain can only handle something like 7 transactions / second at theoretical peak capacity [my numbers may be off, but not by an order of magnitude in either direction], meaning it will never truly be a global currency.

  8. You could discuss how the majority of bitcoin has never been moved since its initial mining date, meaning it is entirely unclear what the true usable supply actually is [because many wallets are surely lost forever on old hard drives etc.]

  9. You could explain how there are thousands of cryptocurrencies, with more being published all the time, some with identical or near-identical rules and codebases, leaving 'value' as being largely driven by social inertia and 'branding', with the ultimate risk that any leading darling gets washed away in the future, so Bitcoin is only questionably a 'store of value'.

  10. You could discuss how moderated inflation is preferable to massive peaks and valleys of inflation vs deflation every week month and year.

  11. You could discuss how the ease of purchasing bitcoin without understanding the blockchain is leading new investors to ignore the lessons of MtGox - "not your wallet, not your coins". As an accountant, I am personally curious how one could ever 'secure' coins in a way that would prevent anyone with the ability to transact on behalf of their company, from simply transferring to their wallet after already leaving the country for a beach somewhere.

And at the end of all that, I would explain to her "don't ever invest your money in something where you don't understand the value proposition in a way that you could explain it to another 9 year-old".

11
  • 1
    In response to your security question, Bitcoin (and other cryptocurrencies like Ethereum) implement multi signature transactions . You could require for example that 3 of 5 board directors are needed for big item purchases, so that no group of 2 can collude and steal the cash, and your funds aren't locked if 2 members get hit by a bus.
    – csiz
    Mar 19 at 23:59
  • 2
    This doesn't answer the question what bitcoins are. It is just a list of arguments against Bitcoin.
    – DonQuiKong
    Mar 20 at 8:48
  • 5
    @DonQuiKong The question isn't "what is bitcoin" - the question is "how can I explain bitcoin to an 8 year-old". You can't understand bitcoin without understanding the centuries of economics and finance that preceded it. If you want to understand Einstein, you have to start at Newton.
    – J...
    Mar 20 at 11:15
  • 2
    @J yeah but you cant explain Bitcoin by only ranting about it's problems. You don't explain cars by explaining climate change and accidents only, neither.
    – DonQuiKong
    Mar 20 at 15:06
  • 2
    @DonQuiKong There is a real tension between whether or not cryptocurrencies are meaningfully currencies or are another variety of commodity with "currency" in the name as part of its marketing. You can explain what Bitcoin "is" without much discussion of how it "works", but that leaves out most of why anyone would invest in it, most description of why it was developed and why there are so many, and why it's not the way that all money works now. Most 8 year olds are going to have trouble with the full details, which mostly don't apply to the "what did you give me?" question described here.
    – Upper_Case
    Mar 20 at 20:04
7

imagine if keeping your car idling 24/7 produced solved Sudokus you could trade for heroin
Theophite on Twitter

It's funny, but it also explains one of the most crucial parts of any popular cryptocurrency: It takes vast amounts of energy to keep the thing running, and this is by design. Any distributed cryptocurrency has to be expensive to run in order to ensure the integrity of the blockchain. Many 8 year olds are conscious of the debates over energy and climate change and this could be a very interesting topic to discuss.

It also gets at the other truth of cryptocurrencies: what they produce is very disconnected from things that an 8 year old would value. To an extent this is true of all currencies, but you're not asking how to explain money. Just like we like gold because it's shiny, there are some people who like the mathematical beauty of the blockchain and all those 'Sudokus' it has solved. But there's no defined value to those Sudokus - there's a maximum value (based on the cost of electricity and computers), but there's no lower value. Unlike other stocks, it doesn't represent things people like to buy: land, products, companies, the hours of labour workers put in. For these reasons it's very different from investing in general stocks like Apple. You're not buying a slice of a company's assets and revenue, you're buying a Sudoku with the hope someone else will want to buy it off you for more later on. Like those who 'invested' in Beanie Babies in the past, you should explain to your 8 year old that you should only buy cryptocurrencies if you really like the technology and will be content if you can never sell them back even for what you bought them originally. You could explain that some cryptocurrencies have features like smart contracts, or the ability to run programs; those things have arguably more inherent value than cold metal, but the current cost of those cryptocurrencies is still mostly driven by speculation, not the value of those services.

(BTW, if you like cryptoart and NFTs, you can buy that tweet! But don't. Because you'd just be contributing to the problem.)

0

This example might be good for a 10 year old.

There are 10 people in the household and they want to exchange money owed to each other for paying for external services and goods such as food/petrol/water/taxes etc. For that they devise their own IOU based currency with one IOU equal to one unit of local currency.

Centralised/bank based payment model

Two people Peter and Paul are payment processor and are entrusted to carry out transactions between different parties, each of them is responsible for four other inhabitants and themselves.

So if Alice wants to pay Bob and they are both serviced by the same payment processor Paul, any IOU will have to pass through Paul.

Alice > Paul > Bob

Paul stores all the transactions for people he manages and every so often he exchanges them with the other payment processor, Peter. So if Alice wants to pay Bart who is not serviced by Paul, she needs to rely on Paul to relay that information to Peter.

Alice > Paul > Peter > Bart

Problem with that approach is that Paul or Peter could manipulate intentionally or unintentionally transactions passing through them.

Distributed/blockchain based payment model

All the parties in the household meet together and witness IOUs being exchanged out in the open.

IOU transfer by Alice to Bob is direct.

Alice > Bob

IOU transfer by Alice to Bart is direct.

Alice > Bart

Advantage of the second approach is that you do not need to trust any party to do their job properly as all transactions are in the open. No one can claim that some of their IOU have been manipulated as all transactions have been witnessed by everyone present.

With distributed backend this trust can expand to many other areas, making blockchain services more transparent and in some case more democratised.

Other example

You could talk about a much older instance of a public ledger, rai stones which might be a slightly more intuitive and certainly less technical.

enter image description here

Problems

Potential problems brought up by Grade 'Eh' Bacon are absolutely valid and are being fixed out bit by bit. I'll address few here breiefly.

  1. Proof-of-stake or proof-of-kernel-work solutions will allow for transactions and smart contracts to submitted with far less energy being wasted on mathematical puzzle.

  2. Over excitement about internet companies many which provided payment services led to the dot-com bubble, sure many failed but also many titans emerged and along with a host of new services.

  3. Traditional financial service providers also had to learn from their mistakes in order not to be robbed or defrauded and still aren't very forthcoming about letting public know about a breach.

  4. Layer 2 solutions and new blockchains such as Polkadot/Algorand/Cosmos are working on increasing the total speed and throughput of the transactions.

I think most importantly Bitcoins is really a proof of concept rather than a full fledged blockchain solution.

2
  • Just going to throw this out there: If bitcoin is just step 1, and 'new blockchains' will supercede it... this proves one of my points in my answer, that the value of a cryptocurrency does not necessarily mean that a particular crypto has value. What happens if BTC's current blockchain is discarded? $59k per share goes to $0 per share overnight. "Proof of concept" is not a great thing to put money in. Mar 22 at 20:36
  • Value of cryptocurrency should ideally be derived from new services that it provides rather than wishful thinking. That said event bitcoin can act as a wedge against inflation that's independent of governmental influence plus it can facilitate payments to places that are under sanctions or do not have an integrated banking system. So there is some inherent value in it, even if grossly overvalued. For it to be discarded overnight you would need to convince everyone to do so, which is just as likely as convincing everyone that gold's value comes solely from its industrial applications. Mar 23 at 20:50
-3

It becomes easy to understand by asking:

What problem(s) does cryptocurrency solve?

Or even more deeply:

What do people currently use to solve their problems, and how does cryptocurrency compare to those solutions?

Cheap, near-instant transfer of money around the world

Consider a quad-bike company based in Melbourne, Australia who needs to buy 50,000 AUD worth of parts from Japan. This would cost them $3000-$6500 just in fees to banks

"The biggest problem with electronic payment systems is fees – they can add as much as 6 to 11 per cent to a transaction, Brim says. Bitcoin charges just 1 per cent."

Whereas bitcoin could do it for 1% ($500) - so if a financial service provider could undercut its nearest competitors by 83-91%, surely that's a pretty serious advantage, right?

Kids language:

Banks take less of your money in fees

Store of value

Something we may take for granted (until a financial crisis) is the ability to store wealth and know that it will be there (possibly some years/decades) later when it's required.

During the financial crisis of 2008, many realised their 'safe' cash and property investments were written down to a small fraction of their initial worth. This was partly because of "a breakdown in responsibilities"1, and partly because of inflation caused by quantitative easing, which involved the purchasing of $40 billion of long term securities every month in the US alone.

In any case, 'low risk' investments like bonds, and even treasury notes were shown to be not as low risk as they appeared. Investors could look into other investments, like precious metals, and even asteroid fragments. But each investment has its pros and cons, for example, holding gold comes with risk of theft or a cost of you storing it at your local bank/mint. So cryptocurrencies offer another option for storing wealth. Is it a 'better' option? Not necessarily, but it's a matter for individuals to decide

Kids language:

Your savings are safer from some risks

More power to online sellers

This doesn't necessarily make cryptocurrency better, but it simply makes it different, which will appeal to some, but not everyone:

When buying online via a service like paypal, the seller probably won't see that money for 90 days, and they have a risk that you could call your credit card company after 89 days and say you never received the goods. This is a big problem for online sellers. But not with cryptocurrency. So this is useful if the seller doesn't want that risk.

Kids language:

Reduced risk of fraud for online sellers

Micropayments

Prior to around 2015, major online payment providers (e.g. PayPal) were not amiable towards payments under $5. So online sellers of small, cheap, and easily delivered products (e.g. stickers, stamps) had much smaller profit margins due to extremely high fees relative to more expensive products. This meant that many online retailers and paid applications simply didn't exist, since it would not be profitable due to payment fees exceeding their revenue.

Kids language:

Tiny payments can be feasible (for things like stickers!)

Reference

1 The Great Crash of 2008, Ross Garnaut, pp 137

12
  • 2
    If you actually want to transfer 50k AUD cheaply you use a currency exchange service like Wise (prev. TransferWise) which will charge you 0.65% for that transfer, about $324. Mar 20 at 8:04
  • @JackAidley do they also have a hidden fee in the form of the forex spread too though?
    – stevec
    Mar 20 at 8:24
  • 3
    That's at current market rate; same as you'll get turning your crypto into useful money. Mar 20 at 11:26
  • 1
    If you're ignoring the costs of getting locally useful currency why not just say you can pay that Japanese sale in AUD for even less? Mar 20 at 14:12
  • 2
    A bank like NAB charges only $30AUD for a foreign SWIFT transfer. Mar 20 at 22:05

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.