Why borrowing money to buy crypto is a terrible idea
Cryptocurrencies have been a hot investment for quite some time now, and it seems like every day there are stories of people getting rich by investing in them. With all the hype surrounding cryptocurrencies, you may be tempted to invest as much as you can – and potentially even borrow a lot of money to do so.
The reality, however, is that borrowing money to buy crypto is a very bad idea. It’s not something anybody should do.
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Why you shouldn’t borrow to buy crypto
As a general rule, borrowing to buy most investments is not a good idea. You agree to pay interest on a debt, when the return on your investment is only speculative. You will need to make repayments on your loan regardless of whether your investment is performing poorly or is making money. And those payments can become a financial burden if you end up suffering investment losses.
Borrowing to buy investments also means that your investment would have to be performing extremely well for you to make a profit. This is because you must first cover the interest charges on a loan with your returns on your investment in order to break even before you make a profit. And you could end up having to sell an investment at an inconvenient time if you have a hard time paying the payments. This could lead to your losses being locked in permanently if you don’t have time to wait for your investment to recover from a downturn.
While this is true for any type of borrowing to invest, the risks are only magnified when you borrow to buy cryptocurrency. This is because crypto investments can be much more dangerous than many other types of investments for several key reasons:
- The cryptocurrency market is extremely volatile. There are huge fluctuations in the prices of digital currencies from day to day. If you don’t time your purchases and sales at exactly the right time – which is really hard to do – you run a very high risk of losing money. If you are borrowing and you have a deadline to make a profit so that you can pay off your loan, then the chances of having to sell at the wrong time increase dramatically.
- There is a lack of regulation in the crypto market. The federal government is still trying to catch up and figure out how to effectively regulate virtual currencies. In the meantime, investors are vulnerable to fraudsters. If you borrow and end up losing money because you have been scammed, you will still have to pay back the entire loan.
- The cost of buying cryptocurrencies can sometimes be separated from their underlying value. Often times, cryptocurrencies see prices rise due to celebrity tweets or social media hype. If the price of virtual currencies goes up because they become the last stock of memes, then the price may drop as people move on to the next big thing. This further increases the risk of losing the borrowed funds.
If you want to invest in cryptocurrencies and you’ve done your research, adding more to your wallet can be a good thing. But you should only invest in virtual currencies with money you can afford to lose. There is a good chance that you cannot afford to borrow money to lose it, so avoid buying crypto with money you got through a personal loan.