Cryptocurrencies have been a hot investment for some time now, and it seems like every day there are stories of people becoming rich by investing in them. With all of the hype surrounding cryptocurrencies, you may be tempted to invest as much as you can in them -- and potentially even borrow a lot of money in order to do so.
The reality, however, is that borrowing money to buy crypto is a really bad idea. It is not something anyone should do.
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Why you shouldn't borrow to buy crypto
As a general rule, borrowing to buy most investments isn't advisable. You'll be committing to paying interest on a debt, while the return on your investment is only speculative. You will have to make payments on your loan regardless of whether your investment performs poorly or makes you money. And those payments can become a financial burden if you end up suffering investment losses.
Borrowing to buy investments also means your investment would have to perform extremely well in order for you to make a profit. That's because you would need to first cover the interest costs of a loan with your investment returns in order to break even before you actually turn a profit. And you might end up being forced to sell an investment at an inopportune time if you struggle to afford payments. This could lead to locking in your losses permanently if you don't have time to wait for your investment to recover from a downturn.
While this is true with any type of borrowing to invest, the risks are only magnified when you are borrowing to buy cryptocurrency. That's because crypto investments can be much more dangerous than many other kinds of investments for a few key reasons:
- The cryptocurrency market is extremely volatile. There are huge swings in digital currency prices from one day to the next. If you don't time your purchase and sales for exactly the right time -- which is really difficult to do -- you stand a very high risk of losing money. If you're borrowing and have a deadline to make a profit so you can repay your loan, then the chances of having to sell at the wrong time go up a lot.
- There's a lack of regulation in the crypto market. The federal government is still trying to catch up and figure out how to effectively regulate virtual currencies. In the meantime, investors are vulnerable to scammers. If you borrow and end up losing the money because you were scammed, you'll still have to repay the entire loan.
- The cost of buying cryptocurrencies can sometimes become divorced from their underlying value. Often, cryptocurrencies see prices rise because of celebrity tweets or social media hype. If the price of virtual currencies is driven up because they become the latest meme stock, then the price can plummet when people move on to the next big thing. This further increases the risk of losing the borrowed funds.
If you want to invest in cryptocurrencies and have done your research, adding some to your portfolio may be a good thing. But you should only invest in virtual currencies with money that you can afford to lose. Chances are good that you can't afford to borrow money only to lose it, so avoid buying crypto with cash you've obtained from a personal loan.
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August 22, 2021 at 10:32PM
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Why Borrowing Money to Buy Crypto Is a Really Bad Idea - Motley Fool
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