“I thought it was a good decision to take out a loan to invest in crypto. Then I lost most of it’
Does it make sense to take out a loan to buy crypto? Almost a quarter of US investors seem to think so.
A recent DebtHammer survey of 1,500 investors in the U.S. found that 21 percent of investors said they used a loan to pay for their crypto investments.
These loans were often offered at exorbitant interest rates, with personal loans being among the most popular. Of all people who reported taking out a cryptocurrency loan, 15 percent said they had taken out a personal loan.
According to the report, other methods of funding crypto investments came from payday loans, mortgage refinances, home equity loans, title loans, and monies left over from student loans.
The survey also highlighted that around 10 percent of people who used payday loans used it to buy crypto: most borrowed between $500 (€503) and $1,000 (€1,007).
But why do so many turn to borrowing to fund cryptocurrency investments in the first place, and is it a viable way to shore up your finances? Some have succeeded; others are not convinced that it is the right decision.
Borrow to pay for crypto
A recent graduate from Leeds, England, who wished to remain anonymous, told Euronews Next that earlier this year he bought £600 worth of bitcoin on a payday loan.
“At the time I thought it was a good decision,” they said. “But the price kept falling – I lost a significant part of my investment.”
DebtHammer data shows that this is not an isolated issue.
Nearly 19 percent of respondents said they had difficulty paying off at least one bill because of their crypto investment, while 15 percent said they were concerned about eviction, foreclosure, or car impoundment.
However, others argue that if credit is 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 – he invested the rest 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 by then I’ll have made enough profit to at least cover the interest … maybe more,” he told Euronews Next.
He notes that he deliberately took out a bigger loan to ensure lower interest rates.
“I could have put the money in [left over from the vet’s bill] immediately back into the loan, but at the time it made more sense to put it into something that had previously worked well and see what happens,” added Griffiths.
However, he stresses that he made the decision with enough money to cover in case the market collapses.
“I wouldn’t do something that stupid,” he said. “Repaying the loan is no problem for me anyway – fortunately I have a reasonably good income.”
Since he made the investment 12 months ago, Griffiths notes that his profits are currently “but not significantly” down.
“I haven’t lost anything by and large,” he continued. “There were times when I could have walked away with a win.”
When asked if he would encourage others to do the same, Griffiths notes that what really matters is “if they have a plan.
Cryptocurrency offers a solution for those with low credit scores
Cryptocurrency platforms also allow users with low credit ratings to borrow money in less regulated ways.
A person who wishes to remain anonymous told Euronews Next that she used cryptocurrency platform Binance to borrow money to negate traditional banking regulations to buy a car.
“I saved about $5,000 [€5,017]However, for various reasons, I had to implement a debt repayment plan. That meant my credit score was literally zero and no one would lend me money,” he told Euronews Next.
“Even with savings, a traditional bank doesn’t allow me to borrow and it has no opportunity to appreciate in value since interest rates are so low.”
With Binance, he could borrow 70 percent of the loan-to-value (LTV) and then use the money to pay the interest.
“I paid $4 over four months [€4] interest and 50 percent of the loan repaid,” he noted.
“Where else could I get a loan that will help pay its own interest and use my current savings as collateral?
“I did this at a time when the market was very low. When prices go up, I also benefit when my investment goes up.”
There are of course risks to this strategy, he notes that the market is highly volatile – as the recent crypto crash has shown.
“However, the worst-case scenario is that its 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 may be possible to borrow money to invest in the crypto market, data shows that doing so often gets people into financial trouble.
So why do people make the decision? according to dr Konstantinos Stylianou, professor of competition law and regulation at the University of Leeds with a focus on 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; Going into debt is risky,” Stylianou told Euronews Next.
“That’s exactly why we want to regulate crypto,” he continued.
Stylianou argues that regulating crypto would protect customers by giving them a better understanding of what they are investing in — especially when it comes to borrowing to fund the investment.
He likens the lack of education and regulation in investing in the cryptocurrency market to mortgages and other loans — which require people to look through an in-depth video or read numerous papers about what individuals are signing up for.
As the crypto market becomes more accessible, the lack of education in crypto markets and financial literacy in general can lead some to invest in bad decisions.
“It’s part of a regulator’s role to protect customers – at the very least, regulators want to make sure customers get more information,” Stylianou added.
“I guess part of the appeal of crypto is the insane returns — as well as the librarian and non-traditional financial system that’s not managed or controlled by big banks,” he noted.
“I can see people being attracted to this type of investment. People are free to choose what kind of investment profile they want for themselves: they can be as risky as they want.
“But I think the biggest risk of cryptocurrency is that if people are typically financially illiterate, which they are, people are ten times less educated about what cryptocurrencies are, how they work, and how they are valued — and therefore, what the future prospects 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.”