Is it wise to take out a loan to buy cryptocurrencies? Almost a quarter of US investors seem to think so.
A recent DebtHammer survey of 1,500 investors across the United States found that 21% of investors said they had used a loan to pay for their crypto investments. .
These loans often had exorbitant interest rates, and personal loans were one of the most popular options. Of the individuals who said they had taken out a cryptocurrency loan, 15% said they used a personal loan.
According to the report, other ways to fund cryptocurrency investments came from leftover funds from payday loans, mortgage refinancings, mortgages, title loans, and student loans.
The study also revealed that about 10% of those who took out a payday loan used it to buy cryptocurrencies.
But why are so many people turning to loans to finance their crypto investments in the first place? Some have succeeded in doing so. Others aren’t convinced it’s the right decision.
Taking out a loan for cryptocurrency payments
A recent graduate from Leeds, England, who requested anonymity, told Euronews Next that he bought £600 (€712) worth of bitcoin earlier this year using a payday loan.
“I thought it was a good decision at the time,” they said. “But the price kept going down – I lost a good amount of my investment.”
DebtHammer’s data shows that this is not an isolated problem.
Nearly 19% of respondents said they had trouble paying at least one bill due to their cryptocurrency investments, and 15% said they were worried about eviction, foreclosure, or car foreclosure.
However, some argue that investing in cryptocurrencies could be a viable option if loans are used wisely.
Aaron Griffiths, from Chester, England, took out a personal loan of £6,000 (€7,117) to pay a £4,000 (€4,745) veterinary bill and invested the rest in various digital currencies: Digitbyte, Bax. , Telcoin, Solana and Opulous and some NFTs.
“The term of the loan is six years. By then, I’m sure we’ll make enough profit to cover the interest at least…probably more,” he told Euronews Next.
He points out that he deliberately took out large loans to secure lower interest rates.
“I could put money in [left over from the vet’s bill] I quickly got back on loan, but at the time it made more sense to put it in what worked before and see what happens,” Griffiths added.
That said, he stresses that he made the decision well-funded in case the market crashed.
“I wouldn’t do such a stupid thing,” he said. “Loan repayment is not a problem for me. Luckily I have a good income.”
Since making the investment 12 months ago, Griffiths says current profits are “but negligible.”
“In the grand scheme of things, I have lost nothing,” he continued. “There was a point where we could walk away with a profit.”
When asked if he would recommend others do the same, Griffiths really said, “It just depends on if they have a plan.
Cryptocurrencies offer a solution for those with low credit scores
Cryptocurrency platforms allow users with low credit scores to borrow money in less regulated ways.
The individual, who requested anonymity, told Euronews Next that he used the cryptocurrency platform Binance to borrow money as a way to negate traditional banking regulations to buy a car.
“I have about 5,000 yen in savings. [€5,017], but for some reason I had to come up with a debt repayment plan. So my credit score was literally zero and no one lent me money,” he told his Euronews Next.
“Even if I have savings, traditional banks won’t let me borrow against it.
Using Binance, he was able to borrow 70% of the Loan-to-Value (LTV) and stake the money to pay interest.
“I paid $4 for 4 months [€4] I paid off 50% of the loan with interest,” he said.
“Where else can you get a loan that will help pay back the interest on its own and use your current savings as collateral?
“We did this when the market was very low, so as the price rises, we also make a profit as we invest more.”
Of course, there are risks with this strategy. He points out that the market is very volatile, as seen in the latest cryptocurrency crash.
But “the worst-case scenario is that his holdings 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 it is sometimes viable to borrow money to invest in the cryptocurrency market, data shows that people often find themselves in financial trouble.
So why do people make decisions? According to Dr Konstantinos Stilianou, a professor of competition law and regulation at the University of Leeds who focuses on digital markets, it’s because “the vast majority of people are economically ignorant.”
“I don’t think it’s a good idea [to invest in crypto with a loan]I think people should be more careful about how they invest. It’s dangerous to be in debt,” Stilianou told Euronews Next.
“This is why we want to regulate cryptocurrencies,” he continued.
Stylianou argues that regulating cryptocurrencies can protect customers by giving them a better understanding of what they are investing in.
He compares the lack of education and regulation of investing in the cryptocurrency market to mortgages and other loans. Mortgages require people to watch detailed videos and read numerous papers on what individuals are signing up for.
As the crypto market becomes more and more accessible, a lack of education about the crypto market and financial literacy in general can lead some to make the wrong investment decisions.
“Protecting customers is part of the role of regulators. At the very least, what regulators want to see is making more information available to customers,” added Stylianou.
“We understand that part of the appeal of cryptocurrencies is the insane returns, as well as librarians and non-traditional financial systems that are not managed or controlled by giant banks,” he said. I got
“We see how people are drawn to this form of investment. People are free to choose the kind of investment profiling they want. They can take as much risk as they want.
“But the main risk of cryptocurrencies is that if people are typically financially ignorant, they may have only a tenth of knowledge about what cryptocurrencies are, how they work, and how they are valued. I think it’s something we don’t have. Here’s the outlook for the future,” concludes Stylianou.
“I don’t really think it’s a good idea to invest more than people can afford to lose, including taking on debt.