U.S. cryptocurrency investors are walking on thin ice on cryptocurrencies these days. Prices for high-profile cryptos are down significantly at the mid-year point.
Bitcoin, for example, has lost approximately 50% of its value in the past two months while Ethereum has fared worse, falling from $4,800 in November 2021 to $1,000 in June 2022.
You’d think downward-sliding cryptos prices would be enough to stop investors from taking excessive risks with cryptocurrencies. But if you thought so – think again, as one-fifth of crypto investors have used a loan to buy more bitcoin, Ethereum, and other investable tokens.
The data comes from a new study by DebtHammer, a financial debt management platform, which makes two key points about cryptocurrencies and personal debt.
Many Americans are leveraging loans to access crypto assets.: According to the study, 21% of crypto-investors said they've used a loan to pay for their cryptocurrency investments.
“Personal loans were most popular, but payday loans, title loans, mortgage refinances, home equity loans, and leftover student loan funds also have been utilized,” DebtHammer reported.
Investors are going into deep debt.: Almost 19% of respondents said they've struggled to pay at least one bill due to the amount of money they've invested in cryptocurrency.
“Additionally, about 15% said they've worried about eviction, foreclosure or car repossession due to their investing,” the report noted.
Never a Good Idea to Borrow for Crypto
Investment professionals urge investors to stay away from taking on debt to dive into cryptocurrencies.
“The cryptocurrency market is a speculative market,” said Anessa Custovic, chief investment officer at Cardinal Retirement Planning in Chapel Hill, N.C. “If I were looking for a speculative investment then I might put a little bit of money in crypto – but not a substantial portion of my portfolio.”
Custovic believes that borrowing money to invest in cryptocurrencies is a toxic idea with no shortage of financial landmines involved.
“I don’t recommend taking out a loan to buy cryptos or other highly speculative assets,” she said. “A loan repayment is not optional and failure to do so would be catastrophic for your financial health. If your investment loses almost all of its value would you be able to pay the loan back without much trouble? If the answer to that question is “no”, then stay away.”
Custovic is hardly alone in that outlook. Other investment professionals say cryptos are fraught with risk right now and not worth the sleepless nights triggered by sliding investment performance and added loan debt.
“It’s a really bad idea to take out loans to buy cryptocurrencies, and for two main reasons” said Sukhi Jutla, co-founder at MarketOrders, a London, UK-based business-to-business marketplace platform for the precious metals industry.
Reason 1: There’s no protection for investors who buy crypto assets.
Reason 2: If you need to take out a loan to invest, it means you don't have the financial bandwidth to withstand any losses, which is a risky move.
“The best strategy with any investment is to use money you don’t need,” Jutla said. “Taking out a loan for cryptocurrency investments goes against that strategy.”
Crypto is Too Speculative to Borrow Against
Other investment specialists note that cryptocurrencies are a speculative and highly volatile class of digital assets that should only be purchased with funds that one is willing to lose.
“One should never borrow or use important savings to invest, but rather invest when one is financially secure and able to take on risks with their capital – whether it be a moderate risk in the stock market or speculative risk in cryptocurrencies,” said Eric Thompson, director and wealth advisor at Round Table Wealth Management in Westfield, N.J. “As we have seen over the last two years, some cryptocurrencies have done extremely well, while other seemingly reputable tokens have gone to zero.”
“In such a risky environment, taking out a loan to invest in cryptos is a terrible idea,” Thompson said.