Why borrowing money to invest in cryptocurrency is a bad idea
Failures and losses are not uncommon for investors. The important thing is to avoid making investment mistakes that you will come to regret. Recently, cryptocurrency has become a popular investment project, with stories of people becoming wealthy by investing in cryptocurrency every day. Despite the increasing hype surrounding cryptocurrencies, it makes you want to invest as much as possible in them, and you may even be tempted to borrow money to do so. However, you should never borrow money to invest in cryptocurrency for several reasons.
Why shouldn’t you borrow money to buy cryptocurrency?
Borrowing money to invest is generally frowned upon in the investment world because any investment is inherently risky. The return on investment is speculative, which means that you must bear the investment risks while also promising to pay interest on any loan debt. Regardless of how well your investments perform, you must repay the loan’s principal amount as well as the interest. If you suffer investment losses, these combined debts will become a financial burden for you.
Borrowing money to invest implies that your investment will perform exceptionally well to generate a decent profit. This is because you must use your investment return to pay the interest cost of borrowing before making a profit. If you cannot repay the cost of the loan, you will most likely be forced to sell the cryptocurrency at a loss. If you do not have the time to wait for the cryptocurrency you invested in to recover from any downturn in value, you may incur losses.
Although this advice is true for borrowing to buy any investment, the risk is amplified when purchasing cryptocurrency this way. Investing in cryptocurrencies may be riskier than other types of investments for several reasons:
⦁ The cryptocurrency market is unstable
The price of cryptocurrencies can be highly volatile. If you get the timing wrong when purchasing in cryptocurrency, you risk making a serious loss. Assuming that you are borrowing to invest in cryptocurrency and there is a deadline by which you must repay the loan, then the chances of selling the cryptocurrency at the wrong time will increase significantly.
⦁ Lack of supervision in the cryptocurrency market
In the United States, the government is still trying to catch up and figure out how to regulate cryptocurrencies effectively. Simultaneously, investors are frequently targeted by hackers and scammers. In the worst-case scenario, if you borrow money to invest in cryptocurrency and then lose money due to hacking and fraud, you must repay the entire borrowing cost as well as the investment loss.
⦁ The cost of buying cryptocurrency is sometimes inflated
Often the price of a cryptocurrency will rise because of celebrity tweets or social media hype. If the price of the cryptocurrency you invest in rises because it becomes the latest meme token, then when people move on to the next hot project, the price may fall, increasing the risk of losing borrowed funds.
In May of this year, the cryptocurrency market was like a roller coaster, with prices soaring and plummeting, causing public concern. Crazed investors raced against the clock. Some people’s capital has multiplied a hundredfold, while others experienced serious losses. If you win, you get rich; but you go back to square one if you lose. Although becoming wealthy in the cryptocurrency field is not impossible, novice investors who want to make a quick buck and enter the market quickly, but fail due to inexperience and poor investment strategy, can easily suffer a financial setback.
According to CoinGecko data, cryptocurrencies fell by more than US$600 billion in May of this year. Every night, their thrilling story was recounted, and many people woke up to find that their cryptocurrency accounts have declined in value.
One novice investor admitted: “I took out a loan from my parents to invest in cryptocurrency.” When I awoke in the morning, I discovered that I had been forced to close the position. Tears were ineffective. I can only repay the money by taking out a loan.”
“After seeing my friends invest in cryptocurrency to make money, I borrowed money from friends and family to invest. I had no idea what I was doing and bought at random. It started with five times leverage and quickly progressed to twenty times leverage. I used to make money, but I never studied it. To make money with cryptocurrency, I buy what others buy. Now that I think about it, I can’t stop myself from acting stupidly. I used to be a short seller, and my position was suddenly liquidated,” said another token buyer, who’d suffered heavy losses.
If you want to invest in cryptocurrencies and have researched, adding crypto to your portfolio may be a good idea. However, you should only invest in the cryptocurrency market using funds that you can afford to lose and make sure that you have enough emergency funds set aside for yourself. Never risk disrupting your daily life by investing in cryptocurrencies if you cannot afford to borrow money to do so.
BigONE is a global cryptocurrency exchange that provides a platform for trading various cryptocurrencies. It was founded in 2017 and registered in the Netherlands. The group operates in Russia, Brazil, Vietnam, Seychelles, Singapore, Japan, and Indonesia, providing marketing, investment, and blockchain technology research & development.