Those who are sensible stick to investing ‘some money’ but those who are not and are not aware of the consequences often borrow money to invest in crypto big time.
Ideally, taking on debt to invest in crypto is a very bad idea because, according to the basic principle of crypto investing, you should not invest money in crypto more than you can afford to and are willing to lose.
This is because , if your venture fails, which is a commonplace in crypto due to its high volatility, then you not only stand to lose all your money but also end up owning a debt which you will have to pay, some way or the other.
The only time borrowing money to invest in any asset class is feasible is when you know that the returns on your investment are high and are somewhat assured.
Also, the risk level in it is quite low, and in crypto both these are not assured.
This is because there are two possibilities that may work against your plan and it will put you in a debt hole.
One, the investment may take a long time to mature and by that time your loan would be due.
And two, the cost of the loan will be usually higher than the average rate of return.
Either way, you incur a loss. After reading this article you will know exactly why.
Is Cryptocurrency Worth Investing by Taking on Debt?
In a few simple words, taking out a loan to invest in a risk asset like cryptocurrency is certainly a very bad idea and is not recommended.
You may not understand why you should not take out a loan to invest in crypto unless you have a clear understanding of margin and leverage and how and when they come into play.
This article will help you in all possible ways to make you knowledgeable so that you do not slip into the vicious black hole of debt being desperate to get into Bitcoin or to own any other type of crypto coins.
You will come across a lot of people out there who will talk for hours at length on the big financial moves they have made recently including refinancing their homes or investing in cryptocurrencies.
On the other hand, you will also come across a lot of people who will talk about how they invested in crypto by taking on credit cards or any other forms of debt.
This is often referred to as ‘Invest a loan’ in financial terms.
Crypto comes with huge growth potential and a lot of promise to make a lot of money from it, and people typically get allured by these prospects.
More so, there are lots of discussions going on over the social media and other websites and forums about what crypt can do to the traditional financial system down the years.
Along with that, an incredible number of success stories, promising ads and videos on crypto make it easy for people to get attracted towards it and start investing in these virtual assets.
And, the ignorant ones invest in it by taking out a loan.
They are the ones who are tempted the most by the hype surrounding crypto and invest as much money as they can in it.
They do not mind investing in crypto even if they have to borrow a lot of money from other sources to do so.
Inevitably, they face the harsh reality very soon and often find themselves engulfed in losses, and, of course, debts.
Therefore, the reality is – borrowing money to invest in crypto is truly a bad idea and anyone should abstain from making such a move.
However, sadly, a lot of people still take risks, often dangerous ones, to invest in crypto by taking out a loan.
Out of those nearly 20% end up not paying their balance off.
Still, you will come across a lot of websites, mostly of crypto exchanges, from all over the world that will epitomize the ‘invest a loan’ concept, which is very sad.
Just type the phrase ‘buy Bitcoin with credit’ in Google and you will see the results.
Therefore, you will find a lot of fuel, tips, and advice out there that will allure you to own crypto coins even at the cost of making some financial sacrifices, which, typically, should be avoided by any responsible person or investor.
A Benign Impulse
There are some people who are relatively benign in this matter.
These are especially those people who have moved a part of their money from mutual funds and stocks.
And, of course, there are others who have crossed all limits and have taken out a home equity loan on their house or used their credit card to invest in crypto.
Though this kind of impulsive behavior is understandable to some extent given the present economic conditions it is something that is not desired.
However, it is the fact that most people, including the Americans, do not have enough money as savings or to retire which is the main reason behind such a behavior.
People now tend to invest in anything that comes in their way to make the deficit up and what else could be better than the much hyped crypto to invest in, they opine.
However, this is a very risky affair because it can leave people in a more vulnerable position being neck deep in debts or arrears.
Their belief that mixing out credit cards will let them make a lot of money backfires.
All this makes crypto investment even riskier because, after all, it is an uncertain investment, experts say.
When people take out loans on their houses or even a personal loan for that matter to invest in crypto, they actually jeopardize their safe haven or their financial freedom for volatile cryptocurrencies.
This leaves them with no room to deal with the risks.
Another significant risk of investing in crypto on loan is that there is no way to avoid paying back the loan amount, whether you make a profit or incur loss from your crypto investments.
Oftentimes, these payments are to be made even before they get sufficient returns from their investments, if at all.
It is this particular fact that makes them look for funds from other resources. This, eventually, puts them in further financial hardships.
Typically, in crypto, you will be rewarded if you manage to stay for a long time.
Add to that, there is no guaranteed profit in crypto, not even in the case of the major ones.
As for the others, there is a high chance, and history corroborates it, that they will soon turn out to be nothing valuable.
Therefore, it is highly likely that you will be in a soup, or a pickle!
You will be surprised to know that even the largest and most popular crypto coins such as Bitcoin does not come with any intrinsic or underlying value. It all depends on the market sentiment.
This means that, it may be so that people suddenly realize one fine day that Bitcoin is passé and move on to Ripple, for example.
In such a situation, the value of Bitcoin will come down to zero.
This also means that now you have more credit card debt or any other debt and no income!
What are you going to do in such a situation?
According to financial experts and advisors, taking out a loan to invest in cryptocurrencies is nothing but a misuse of debt.
This can lead to a similar frightening situation like it happened during the 2008 housing crisis.
However, when the bubble bursts, the prices will actually fall and you will find yourself in a situation where even all your assets will not be enough to cover all your debts, previous and current.
A Bad Idea
Therefore, as a general rule, you should not ever borrow money to invest in crypto.
It is not advisable because buying crypto with a loan will not only create a lot of problems but may leave you with dire consequences, never being able to attain financial freedom.
Typically, when you take out a loan, you usually commit yourself, or enter into an agreement with the lender that you will repay the money along with the predetermined interest.
And, you also agree that you will not fail to make the payments within the stipulated time period.
On the other hand, when you invest in crypto there is no agreement of a fixed return to be provided to you because it is entirely speculative in nature.
There is no assurance as well that your investment will perform exceptionally well to provide you with a high amount of returns.
However, it is essential that you get enough returns to cover the cost or interest on our loan first so that you break even before you actually start to make profits.
If that does not happen, you may be compelled to sell off your investment in an inopportune moment to find some relief when you are struggling to make your repayments.
This will result in permanent locking of your losses without giving any time to your investment to recuperate from a downward spiral.
This means that, when you take a loan, you are liable to repay regardless of whether the crypto in which you have invested your money performs poorly or provides high returns.
This eventually means that you have taken on an additional financial burden and if you do not repay you sacrifice your financial freedom.
Moreover, the situation will become even worse if you incur losses on your investment, just as it is in any type of investment.
However, in crypto, the risks are only puffed up much more when you put your borrowed money into it.
There are a few specific reasons to consider crypto to be a more dangerous type of ‘invest in a loan’ than any other kind of investments.
It is very important to time your purchase and sale of crypto assets correctly or else you will stand a higher chance of losing money, and this is quite a difficult thing to do, especially if you are a beginner in this field.
The chances of selling your assets at the wrong time is even more in the case of crypto since you will have to maintain the deadline of repaying your loans.
Also, the lack of any or proper regulation in the crypto market makes the investors and traders participating in it more vulnerable to hacks and scams.
If you borrow money to invest in crypto and end up being scammed and losing your money, there will be no recourse.
However, that does not take away the liability of repaying the loan from you, legally.
Moreover, the price of a crypto coin may be quite different from its actual value due to social media hype or celebrity tweets.
In the case of these meme stocks there is a high chance of its price to plummet, which is a commonplace because these types of hype are short-lived, people will soon move to the next big thing which will result in the crashing of price of these hyped crypto coins.
All these will increase your risks of losing even further which will eventually push you further inside the debt hole.
Therefore, never invest in crypto if:
- You do not have enough additional money in your hand that you can invest and not mind even if you lose the entire amount and
- If you do not do your own research and due diligence.
To sum up, do not invest in crypto until you are ready financially and are not knowledgeable about the coins and the process.
Otherwise, you will increase the chances of losing your money and putting yourself in a debt situation.
Typically, no one borrows money to lose it and take on additional financial burden and therefore you should not do it either.
Therefore, whether you are planning to take home equity loan, or a personal loan, or even a crypto loan for that matter to invest in cryptocurrencies, be prudent and do not enter into such a risky venture.
This is because using a loan to buy crypto resembles gambling in more than one way.
Investing in risky asset classes like cryptocurrencies on a loan is a certain no-no even if you feel that the prospects are high in it, which is true.
However, the reasons to say so must be clear to you by now after reading this article. Therefore, be sensible.