The Financial Literacy of Cryptocurrency, Explained

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When one first makes the decision to enter into the world of cryptocurrency, they have to answer a critical question — what is money, really? How can bits of digital data be valuable in the same way that physical cash or a deposit in a bank is?

It’s likely that most of us don’t spend much time thinking about questions like these unless we’ve already taken a deep dive into the world of cryptocurrency or economic theory in general. That is due in part because the average person hasn’t been taught some of the most critical components of financial literacy.

The great news is that getting involved in crypto means that you will have a much better understanding of economic theory as it applies to currency, where it comes from, where it gets its value, and why that value could change day-to-day. Join us as we go over some of the key elements of financial literacy that you should know as part of your journey into cryptocurrency.

Limitless Money

We often think of money as being a limited resource. It always seems like we never have enough to cover our living expenses and other surprise bills. But the truth is, money as we know it today (namely, national currencies like the US dollar or Euro) are unlimited. If the government or central bank in charge of the currency wants to print more, there is nothing stopping them from doing so. Each time the central bank prints a $100 bill or €500 note, that note has value.

Many countries print countless reams of cash to pay their national debt and other expenses. But this ceaseless printing of new money has a very dangerous downside. Money is valuable because it is rare. Or rather, it requires work or investment to acquire it. But the more money that a country or central bank prints, the less each note is worth. This process can be described by using the term inflation. It means the value of the money in your pocket or bank account is always going down, without exception and without fail, because more is always being printed.

This is one of the reasons why we are encouraged to keep our money in a bank or stock market. The idea is that your earnings or returns here should ideally at least keep pace with inflation. But since bank savings rates have dropped well below inflation rates in most parts of the world and stock markets come with incredible risk, there really is no perfectly safe and reliable means of protecting your money from this endless invisible tax that slowly eats up at your money’s purchasing power.

In short, money may seem like a rare resource, but the truth is as long as a person, group, company, or government has control over deciding how much new money to print, the value of that money will always be on an endless downward slope.

Seek Assets, not Debt

The typical adult in the world today is in debt. Perhaps they have credit card debt, unpaid student loans, a car loan, a mortgage, or some other form of debt. This occurrence is no accident. Economies today are designed to operate on and for debt. It’s reasonable to assume that most adults today do not have an in-depth understanding of how debt really works. Debt is like a trap that you fall into and can struggle against for the rest of your life.

The opposite of debt, generally speaking, is savings and asset ownership. The term asset means something of value that you own that can be sold, exchanged, or traded for something else of value.

One essential point we need to learn about financial literacy is the true nature of debt and why it should be avoided when possible. In some ways debt is inevitable, but that doesn’t mean you should take on debts without carefully considering the ramifications of doing so. Instead of living a debt-based life, we should instead seek to own assets of value that will maintain their value or increase their value over time. For example, real estate tends to have a steady value and often increases in value.

If we do need to borrow money, the best way to do so is to get loans that are asset-backed so that interest rates will be minimized and fees kept as close to zero as possible. Asset-backed loans are very low risk for lenders, and they pass on the savings of their reduced risk to you. Trust-based loans, such as loans that rely on a credit score, are much riskier for lenders, which is why they come with much higher interest rates attached to them.

Seek True Diversification

To the average casual investor, diversification typically just means don’t put all your eggs in one basket. Or in more applicable terms, don’t put all your money in the stock market in just a handful of companies, or even multiple companies in the same industry. That can be decent advice, but it is incomplete.

Let’s suppose you took that advice and invested in a diversified range of stocks and bonds in different industries and of different risk levels. What happens if your entire national economy suffers a recession? What if there is a global recession with many countries affected by a major downslide? Just look at the 2008 global recession to see what kind of damage such an event can do to a portfolio.

Let’s consider another point. How many different foreign currencies do you store your value in? If you are like most people, the answer is probably close to zero, aside from that change you keep in your sock drawer that was leftover from your vacation to Italy. What some may not realize is that national currencies can and do drop in value regularly. Sometimes, the drop can be sustained and highly destructive.

In order to achieve true diversity of investment, we need to store our money in assets that are uncorrelated. To simplify, that means you should hold assets that have a value that is not directly or indirectly linked to something else.

For example, if several countries that use the Euro suffer from a major recession, the value of the Euro will likely drop. Not only that, but stocks and investments from those countries will similarly drop. These drops in price happened because the assets are linked, or correlated, with each other.

Compare that to bitcoin — it’s an asset that exists completely independently of any country, government, or local economy. That means if your country or a country you are invested in suffers from a recession, your bitcoin will most likely be unaffected. If anything, your bitcoin holdings may see a rise in value as other individuals like yourself are trying to move their assets away from declining national currencies.

Some other classic examples of assets like this include gold and silver. While these can be a great choice for some investors, gold and silver are notoriously difficult to invest in independently. If you want to invest in gold, you’ll need to either buy physical pieces of gold and keep them secure from theft or other forms of loss. If you don’t want to take on the risk of holding the gold, then you will need to pay someone, such as a gold fund operator, to do so for you for a price. Bitcoin, on the other hand, can be held directly and securely with extremely low risk of loss (assuming you take the right precautions) and without the need to pay a third party to keep it secure for you.

Knowledge is Power

One of the best aspects of getting involved in cryptocurrency is that it forces you to take a closer look at your relationship with money. The more you understand about the true nature of money, savings, debt, and risk, the better you can take control of your own financial future.

What’s your take? Let us know what you think is the most important aspect of financial literacy that everyone should have in the comments below.

About Celsius Network

Celsius Network is a democratized interest income and lending platform accessible via a mobile app. Built on the belief that financial services should only do what is in the best interests of the community, Celsius is a modern platform where membership provides access to curated financial services that are not available through traditional financial institutions. Crypto holders can earn interest by transferring their coins to their Celsius Wallet and borrow USD against their crypto collateral at interest rates as low as 4.95% APR.

Download the Celsius Network app and start earning interest on your crypto today ➡️

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