Is it wise to get a loan to buy crypto? Almost a quarter of American investors seem to think so.
A recent survey by DebtHammer, which surveyed 1,500 investors across the US, found that 21 percent of investors said they used a loan to pay for their crypto investments.
These loans were often at exorbitant rates, with personal loans among the most popular choices. Of all individuals who said they had taken out a cryptocurrency loan, 15 percent said they used a personal loan.
According to the report, other methods of financing crypto investments came from payday loans, mortgage refinances, home equity loans, title loans, and leftover funds from student loans.
The survey also highlighted that about 10 percent of people who used payday loans used it to buy crypto: most borrowed from $500 (€503) to $1,000 (€1,007).
But why are so many turning to loans to fund cryptocurrency investments in the first place, and is it a sensible way to support your finances? Some have had success doing this; others are not convinced that it is the right decision.
Getting loans to pay for crypto
A recent graduate from Leeds, England, who wished to remain anonymous, told Euronews Next that they used a payday loan to buy £600 (€712) of Bitcoin earlier this year.
“At the time I thought it was a good decision,” they said. “But the price kept falling – I lost a significant amount of my investment.”
Data from DebtHammer shows that this is not an isolated issue.
Almost 19 percent of respondents said they had struggled to pay at least one bill because of their crypto investment, while 15 percent noted that they were worried about eviction, seizure or car repossession.
Others, however, argue that if loans are 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 off a £4,000 (€4,745) vet bill – investing the rest in 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 I’ll have made enough profit to at least cover the interest by then… maybe more,” he told Euronews Next.
He notes that he deliberately took out a larger loan to secure lower interest rates.
“I could have put the money [left over from the vet’s bill] back on loan straight away, but at the time it made more sense to put him in something he’s done well before and see what happens,” Griffiths added.
That said, he points out that he made the decision with enough money to spare in case the market crashes.
“I wouldn’t do something so stupid,” he said. “Repaying the loan is not a concern for me – luckily I have a pretty good income.”
Since he made the investment 12 months ago, Griffiths notes that his profits are currently down “but insignificantly”.
“I haven’t lost anything in the grand scheme of things,” he continued. “There were moments in time where I could have walked away with a profit.”
When asked if he would encourage others to do the same, Griffiths notes that it really “depends on whether they have a plan. I personally wouldn’t take out a loan just to invest – you’d be against them payments if you lose money”.
Cryptocurrency offers a solution for those with a low credit score
Cryptocurrency platforms also allow users with low credit scores to borrow money in a less regulated way.
An individual who wished to remain anonymous told Euronews Next that he has used the Binance cryptocurrency platform to borrow money as a way to defy traditional banking regulations to buy a car.
“I have about $5,000 in savings [€5,017], however, for a variety of reasons, I had to go on a debt settlement plan. That meant my credit score was literally zero and no one would lend me money,” he told Euronews Next.
“Even with thrift, a traditional bank won’t let me borrow against it, and there’s no way it’s going to grow in value because interest rates are so low.”
Using Binance, he was able to borrow 70 percent loan-to-value (LTV) and then put the money away to help pay the interest.
“Over four months, I paid $4 [€4] in interest and returned 50 percent of the loan,” he noted.
“Where else will I be able to get a loan that helps pay off the interest and use my current savings as collateral?
“I did this at a time when the market was very low, so as prices rise, I also benefit by increasing my investment.”
Of course there are risks to this strategy, he notes that the market is very volatile – as seen in the recent crypto crash.
However, “the worst case scenario is that his properties 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?
Although there are some circumstances where borrowing money to invest in the crypto market may be viable, data shows that it often leads people to financial difficulties.
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 need to be a lot more careful about how they invest; taking on debt is dangerous,” Stylianou told Euronews Next.
“This is exactly why we want to regulate cryptocurrencies,” he continued.
Stylianou argues that regulating crypto would protect clients by giving them a better understanding of what they are investing in – especially if it involves taking on debt to finance the investment.
He compares the lack of education and regulation about investing in the cryptocurrency market to mortgages and other loans — where people are required to sit through an in-depth video or read numerous letters about what individuals are signing up for.
While the crypto market is becoming more and more accessible, the lack of education in the crypto markets and financial literacy in general can lead some to make poor investment decisions.
“It’s part of a regulator’s role to protect customers – at least what regulators want to make sure is that customers get more information,” Stylianou added.
“I appreciate that part of the appeal of crypto is the insane returns — as well as the library and non-traditional financial system, not managed or controlled by the big banks,” he noted.
“I can see how people are attracted to this form 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 main danger of cryptocurrency is that, if people are normally financially illiterate, which they are, they are ten times less informed about what cryptocurrencies are, how they work and how they are valued – and therefore, what the prospects of of the future are”, concluded Stylianou.
“I really don’t think it’s a good idea to invest more than people can afford to lose, including taking on debt.”