Get a loan to invest in crypto? Forget that

US cryptocurrency investors are walking on thin ice on cryptocurrencies these days. The prices of high-level cryptos dropped significantly in the middle of the year.

Bitcoin, for example, has lost around 50% of its value in the past two months, while Ethereum has done worse, falling from $4,800 in November 2021 to $1,000 in June 2022.

You would think that falling crypto prices would be enough to prevent investors from taking excessive risks with cryptocurrencies. But if you thought so, think again, because a 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 Leverage Loans to Access Crypto Assets.: According to the study, 21% of crypto investors said they used a loan to pay for their cryptocurrency investments.

“Personal loans were the most popular, but payday loans, title loans, mortgage refinances, home equity loans and leftover student loan funds were also used,” DebtHammer reported.

Investors go deep into debt. : Nearly 19% of respondents said they had trouble paying at least one bill due to the amount of money they invested in cryptocurrency.

“Additionally, about 15% said they were worried about eviction, seizure or repossession of a car because of their investment,” the report notes.

It’s never a good idea to borrow for crypto

Investment professionals are urging investors to avoid going into 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, NC “If I was looking for a speculative investment, I might put some money into crypto – but not a substantial part of my portfolio.

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Custovic thinks 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 crypto 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 most of its value, would you be able to repay the loan without too much trouble? If the answer to this question is “no”, then stay away.

Custovic is not alone in this perspective. Other investment professionals say cryptos are very risky right now and not worth the sleepless nights triggered by declining investment performance and rising loan debt.

“It’s a very bad idea to take out loans to buy cryptocurrencies, and for two main reasons,” said Sukhi Jutla, co-founder of MarketOrders, a business-to-business marketplace platform based in London, UK. United, for the precious metals industry.

Reason 1: There is no protection for investors buying crypto assets.

Reason 2: If you need to take out a loan to invest, it means that you don’t have the financial bandwidth to bear possible losses, which is risky.

“The best strategy with any investment is to use the money you don’t need,” Jutla said. “Taking out a loan for cryptocurrency investments goes against this strategy.”

Crypto is too speculative to borrow against

Other investment scholars note that cryptocurrencies are a speculative and highly volatile class of digital assets that should only be purchased with funds one is prepared to lose.

“Never borrow or use large savings to invest, but rather invest when you are financially secure and able to take risks with your capital – whether it is moderate risk in the stock market or speculative risk in cryptocurrencies,” said Eric Thompson. , Director and Wealth Management Advisor at Round Table Wealth Management in Westfield, NJ “As we have seen over the past two years, some cryptocurrencies have done extremely well, while other seemingly reputable tokens are dropped to zero.”

“In such a risky environment, taking out a loan to invest in crypto is a terrible idea,” Thompson said.

Dorothy H. Lewis