The importance of financial and crypto literacy in the new digital economy

The importance of financial and crypto literacy in the new digital economy

Over the past few decades, economic growth has spurred remarkable advances in technology and expanding access to financial services. A growing number of people have access to financial opportunities previously reserved for the wealthy or middle class. And this is thanks to the financial technology (fintech) that has seen a rapid growth and evolution the past few years. As fintech allows financial institutions to reach more and more people, there are increasingly many opportunities to combat inequity, foster economic growth, and deliver higher standards of living. But the problem is that most of the existing financial products and services are still complex, eluding the understanding of the lay person. Fintechs may do it a little easier for the average person, but consumers still need to have increasing financial sophistication to make effective use of fintech products and avoid fraud and costly mistakes.

In simple words, financial literacy is essential, especially in this new era of digital finance and economy. Shockingly, today a big number of people do not comprehend basic financial principles, which makes financial illiteracy a serious problem worldwide. According to the Global Financial Literacy Excellence Center (GFLEC), only the 33% of adults worldwide are financially literate. The main reason so many people lack at least basic financial education is that it is not taught in most schools and institutions of learning worldwide, meaning that parents themselves should teach their kids about money, but this isn’t happening either and something must be done about it.

So what exactly is financial literacy, and why is it important? Financial literacy is described as the ability to understand how money works and how to make sound financial decisions so you can confidently manage and grow your money. It includes financial topics such as budgeting, saving, investing and basic concepts such as inflation, interest rates and risk diversification. When you’re financially literate, you’re able to allocate your income toward various goals simultaneously, not just to ongoing expenses, but to savings, debt repayment and an emergency fund. You can navigate the financial marketplace with self-assurance, and you have the tools to thoroughly research things like loans, credit cards and investment opportunities.

The truth is that money is essential in our life. Money is and should not be seen as anything else but a tool – a tool that we all must learn how to use it in the right way. Money is a tool that enables you to protect yourself and your family, build a better life, and give back to your community. It enables you to have more control over your life, more freedom to carve out your own path, and fewer constraints on your choices. Financial literacy is not a luxury, but a necessity. Getting financial education will help you feel in control of your finances and less stressed about money. Ideally, with strong financial literacy, you’ll be confident in money management to the point where you can focus your energy elsewhere: on family, your hobbies and the things you love doing most, and the parts of life that money can’t buy.

But is the basic financial literacy enough in this new digital era? The answer is no. As the world and technology evolve, we must keep up with the new technologies that are related with the world economy and our money, and are here to stay and change our lives. The most obvious example is cryptocurrencies. Blockchain technology and cryptocurrencies exist only for a decade, but they are already being adopted widely, revolutionizing many sectors, and they are here to change everything we knew about money. We can transact, send or receive money through cryptocurrencies no matter where we live, fast, securely, with low-costs and without having to rely on a third-party like a bank. And that’s the main reason why crypto literacy is essential, too. It’s a whole new (financial) world, with many benefits and opportunities. We can use cryptocurrencies and blockchain to transact peer to peer, secure our data and privacy, become our own bank and use DeFi services, as a medium of exchange, as a store of value, as an investment vehicle, as a way to earn passive income and the possibilities and use cases are endless.

But there is one problem: Cryptocurrencies are still considered unapproachable and complex for the majority and most investors, often written with highly technical language that makes it both difficult to understand and intimidating to start investing in them. That’s one of the main reasons crypto-investors were caught off guard in the end of 2017. They were buying at very high prices, without the proper knowledge, understanding and research. And this is where crypto literacy comes in, in combination with the financial literacy. Learning how the technology, cryptocurrencies and the crypto-market work can keep new investors from making simple and easy-to-avoid mistakes. We could describe crypto literacy as the ability to understand how the different cryptocurrencies and the crypto-market work, how to use the technology and transact, send and receive cryptocurrencies, how to store them, how to research and distinguish good from bad projects and finally, how to avoid shady projects and don’t fall for scams. The more educated you are, the more prepared you’ll be.

According to the results of Bank of Canada’s 2019 Cash Alternative Survey, those with less financial knowledge may be twice as likely to invest in cryptocurrencies. The report mentioned that “A large part of the cryptocurrency market is compromised of unsophisticated investors with lower financial literacy skills. These investors are likely to overestimate the reward prospects in cryptocurrencies and underestimate the risk involved in related investment.”. Data also suggests that many investors are shying away from crypto due to a lack of crypto literacy and understanding of how cryptocurrencies work.

This is why I strongly believe that both financial and crypto literacy are equally important for the present and future. On the one hand, most financially literate people need cryptocurrency education, and on the other hand, most crypto literate people need financial education.

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