During the 2018 rise of cryptocurrencies, you may have considered borrowing money to join in. Or maybe you saw the writing on the wall and only “invested” money you could afford to lose.
Getting caught up in the hype and spending big on cryptocurrency is easy to do, but should you borrow money to buy in? Here’s why we think that’s a bad idea.
1. Your Line of Credit May Prohibit the Purchase of Cryptocurrencies
Many lenders providing credit prohibit the purchase of cryptocurrencies. This mostly applies to credit cards but can apply to other types of credit as well.
The reasoning behind this is simple. Cryptocurrency “investment” is still highly speculative and is yet to prove itself (just look at these cryptocurrency investment risks for starters). You have the potential to lose a lot of money, and the banks don’t want you doing this with their money.
If you max out your credit card on one of the best exchanges, then there’s a big chance you’ll lose money. How will the finance provider recover their funds if you cannot repay them? If you buy physical goods, they at least have a chance of recouping funds by sending in debt collection agents. Cryptocurrency debt recovery? Forget it.
Sure, there are workarounds, but any cheating of the system won’t look good on you. Credit cards are famous for their payment protection, but you can forget about that if you breach the terms of service. Depending on your country and how excessive your crypto spending is, you may even get charged for fraud.
2. You’re Paying for Something You Already Have
We get it, buying stuff is fun, and buying cryptocurrencies is exciting! But making loan repayments isn’t so fun. If you take a huge loan to buy some crypto, how long will you be paying that back for? You may get lucky and strike the jackpot overnight, but what if you don’t? What if the price remains steady for months, or even worse, plummets? Then you’ll be paying out money on loan repayments for a negative equity asset. If you can call cryptocurrency equity.
If you save up to buy a cryptocurrency instead of taking a loan, it may take longer, but you won’t have a debt hanging over you, requiring repayments for months or even years. Yes, it may take longer, but will that really make a difference in one, three, or five years time?
3. You’ll Pay Interest
Credit cards and other loans charge large fees and interest. Sure, they may tempt you with introductory offers, but you’ll still have to pay interest at some point unless you pay the loan off almost immediately. If you’re in a position to pay off a loan within a month or so, why are you bothering to begin with?
If you’re tempted to borrow to finance a cryptocurrency purchase, remember to factor the interest and any fees charged into your calculations. Buy now, pay later deals may look tempting, but those fees can quickly eat into your profit from selling the cryptocurrencies, assuming they go up in value at all.
By borrowing money to buy cryptocurrency, you are essentially betting against the loaner. If the price goes up, you may do very well, pay off the loan and retire a happy person. If the cryptocurrency goes down, however, you’ll be out of pocket, and stuck with a potentially big debt.
4. You May Have to Provide a Security
Banks and other loan providers aren’t stupid. When taking out a big loan, lenders may insist on a security deposit. This could be a house, car, or any other valuable asset. Should you default on loan repayments, the lender can legally come and take your stuff.
Is it really worth gambling your possessions on a cryptocurrency? You may win big, but you may also lose big. Is it really worth risking your car or house? If you drive a lot, can you still do your job without a car? What about any family members dependent on you? I’m sure a few virtual currencies will really help them sleep better without a bedroom.
5. You Could Get Hurt, or Worse
Ok, so we’ve persuaded you so far. Committing fraud, lying to the bank, or loading up a credit card isn’t the best solution. What about a local friendly lender, or payday loan company? They don’t ask many questions, right?
Well, an unscrupulous lender may be more than happy to lend you money to gamble on the cryptocurrency market, but they will come after you to get it back!
Not only do quick cash loan schemes charge excessive interest (more so than credit cards or bank loans), but some lenders may not act ethically or even legally. Can’t pay? Good luck hanging on to your kneecaps. Like your kidneys? Tough, they get sold to service your debt. RIP your liver.
I joke, these are extreme examples, but not outside the realms of possibility, should you borrow from outright criminals. Is it really worth it for the slim chance of making some extra cash?
Never Risk It All on Cryptocurrency
These examples show just what could happen if you take out a loan to buy cryptocurrencies. If you buy a fancy car or a big television, at least the lender can take that back to pay some of your debt. Due to the decentralized nature of cryptocurrency, you may hold on to your coins, but risk losing everything else.
While you may get lucky and make a fortune (and plenty of people have), you’ll always be better off buying cryptocurrencies with money you have. No, not your rent! Disposable income you can afford to lose in the event of another market crash.
If you’re looking for a different way to borrow money, then why not read Dan’s piece on the best crypto credit cards. These let you have the best of both worlds, flexible finance and blockchain backed excitement.