Does it make sense to take out a loan to invest in crypto?
Does it make sense to take out a loan to buy crypto? Nearly a quarter of US investors seem to think so.
A recent survey by DebtHammer, which surveyed 1,500 investors across the United States, found that 21% of investors said they used a loan to pay for their crypto investments.
These loans were often at exorbitant rates, with personal loans being among the most popular choices. Of all the people who said they took out a loan for cryptocurrency, 15% said they used a personal loan.
According to the report, other methods of funding crypto investments came from payday loans, mortgage refinances, housing equality loans, title loans, and leftover funds from student loans.
The survey also found that around 10% of people who used payday loans used it to buy crypto: most borrowed between $500 (€503) and $1,000 (€1,007 ).
But why are so many people turning to loans to fund cryptocurrency investments and is it a smart way to shore up your finances? Some have succeeded in doing so; others aren’t convinced it’s the right decision.
Take out loans to pay for crypto
A recent graduate from Leeds, England, who wished to remain anonymous, told Euronews Next that they used a payday loan to buy £600 (€712) worth of Bitcoin earlier this year.
“At the time, I thought it was a good decision,” they said. “But the price continued to fall – I lost a significant part of my investment.”
Data from DebtHammer shows that this is not an isolated problem.
Nearly 19% of respondents said they had trouble paying off at least one bill due to their crypto investment, while 15% said they feared eviction, seizure or car repossession .
Others, however, argue that if loans are used wisely, investing in crypto can be a viable option.
Aaron Griffiths, from Chester, England, took out a £6,000 (€7,117) personal loan to pay a £4,000 (€4,745) vet bill – the rest he invested in the various digital currencies : Digitbyte, Bax, Telcoin, Solana and Opulous and a number of NFTs.
“The term of the loan is six years; I’m sure I will have made enough profit to at least cover the interest by then…maybe more,” he told Euronews Next.
He notes that he deliberately took out a larger loan to secure lower interest rates.
“I could have put the money [left over from the vet’s bill] immediately on loan, but at the time it made more sense to put it in something that had worked well before and see what happens,” Griffiths added.
That said, he points out that he made the decision with enough money to spare in case the market crashes.
“I wouldn’t do something that stupid,” he said. “Repaying the loan is not a concern for me – luckily I have a reasonably good income.”
Since making the investment 12 months ago, Griffiths notes that its earnings are currently down “but inconsequential”.
“I haven’t lost anything in the grand scheme of things,” he continued. “There were times when I could have walked away with a profit.”
When asked if he would encourage others to do the same, Griffiths notes that it “really depends on whether they have a plan. money”.
Cryptocurrency offers a solution for those with low credit
Cryptocurrency platforms also allow users with low credit scores to borrow money in a less regulated manner.
An individual who wished to remain anonymous told Euronews Next that he used cryptocurrency platform Binance to borrow money to circumvent traditional banking regulations in order to buy a car.
“I have savings of about $5,000 [€5,017], however, for a number of reasons, I had to follow a debt repayment plan. It meant that my credit score was literally zero and no one was lending me money,” he told Euronews Next.
“Even with savings, a traditional bank won’t allow me to borrow against it and it has no way to increase its value because the interest rates are so low.”
Using Binance, he was able to borrow 70% loan-to-value (LTV) and then stake the money to help pay the interest.
“In four months, I paid $4 [€4] interest and repaid 50% of the loan,” he noted.
“Where else could I take out a loan that helps pay off its own interest and use my current savings as collateral?
“I did this when the market was really low, so when prices go up, I also profit from the increase in my investment.”
There are of course risks to this strategy, he notes that the market is very volatile – as seen in the latest crypto crash.
However, “the worst case scenario is that his assets are liquidated. It’s no worse than having to use my savings to buy a car anyway,” he said.
Can Financial Literacy and Crypto Education Prevent Debt?
While there are certain circumstances where borrowing money to invest in the crypto market can be viable, data shows that it often leads people to financial hardship.
So why do people make the decision? According to Dr Konstantinos Stylianou, a professor of competition law and regulation at the University of Leeds who specializes in digital markets, this is because “the vast majority of people are financially illiterate”.
“I don’t think it’s a good idea [to invest in crypto with a loan]. I think people should be a lot more careful about how they invest; getting into debt is risky,” Stylianou told Euronews Next.
“That’s precisely why we want to regulate crypto,” he continued.
Stylianou argues that crypto regulation would protect customers by giving them a better understanding of what they are investing in, particularly if it involves taking on debt to fund the investment.
He compares the lack of education and regulation on investing in the cryptocurrency market to mortgages and other loans – where people are required to watch an in-depth video or read numerous articles about what individuals s register.
With the crypto market becoming more accessible, lack of education about crypto markets and financial knowledge, in general, can cause some to make poor investing decisions.
“It’s part of a regulator’s role to protect customers — at the very least, what regulators want to make sure is that customers get more information,” Stylianou added.
“I appreciate that part of the allure of crypto is the insane returns – as well as the library and non-traditional financial system, not managed or controlled by the big banks,” he noted.
“I can see how people are drawn to this form of investing. People are free to choose the kind of investment profile they want for themselves: they can be as risky as they want. .
“But I think the major risk of cryptocurrency is that, if people are normally financially illiterate, which they are, they are ten times less informed about what cryptocurrencies are, how they work and how they are valued – and so, what the prospects for the future are,” concluded Stylianou.
“I really don’t think it’s a good idea to invest more than people can afford to lose, including going into debt.”
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