Americans Are Borrowing Money to Buy Crypto. Should You? - The Motley Fool

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by David Chang, ChFC®, CLU® | Published on Aug. 7, 2022
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Crypto prices have fallen. Should you borrow money to invest?
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A recent survey shows that almost 1 out of 4 crypto investors have taken out loans to invest in cryptocurrencies. Some have gone as far to take out payday loans, which can have interest rates as high as 400%. With crypto's wild ride and the market down almost $2 trillion from its high, is it a good time to take out a loan to invest in cryptocurrencies?
To take advantage of the crypto market's meteoric rise, many investors have taken out loans hoping to cash in. According to a survey by DebtHammer, personal loans are the most popular type of loan taken out.
Borrowers have also used payday loans, title loans, home equity lines of credit, and mortgage refinances to purchase cryptocurrencies. Loans aren't the only source of financing for crypto investors. More than 35% have used credit cards with just 1 out 5 saying they pay off their bill every month, and 1% have maxed out their credit cards.
But is this a good idea? The survey found that about 1 in 10 who have used a payday loan used one to buy cryptocurrencies. Most of them borrowed between $500 to $1,000. With the average interest rate of a typical payday loan at 400%, the fees and interest you pay will likely be more than any potential gain. The reality is that it's likely to only put you further in debt.
Almost 1 out of 5 stated in the survey that they have struggled to pay at least one bill because of their crypto investment. Of crypto investors who borrowed money to only invest, over 12% are worried about foreclosure, 6% being evicted, and 9% worried about their car being repossessed.
Unfortunately, the majority have lost money on crypto. Over 11% have lost more than $50,000 and just 1.5% said they made the same amount. In fact, 52% of payday loan borrowers have lost up to $1,000 while 32% have gained up to $1,000. What's more, 13% have lost between $1,000 and $5,000 and close to 2% have lost between $5,000 and $20,000.
Despite the heavy losses, over 70% of crypto investors who borrowed money to invest believe crypto is a good investment opportunity. This is compared to about 50% of all survey respondents.
When asked what made them decide to borrow money to buy crypto, over 40% of respondents stated it was due to the sharp decline in crypto prices or because prices are historically low. Close to 20% borrowed because of a 0% promotional interest rate they were offered, and 16% believe crypto is a good investment.
Since crypto prices peaked in November 2021, prices declined as much as 60%, wiping out $2 trillion. With prices fluctuating rapidly, many investors are hoping to take advantage of the market downturn. However, like any investment, it is next to impossible to know if crypto has hit bottom. Buying the dip is a good strategy when price drops are temporary and over the long run prices continue to go up, but there is a chance that crypto prices fall even further.
Investors should be cautious about investing in a risky investment such as crypto, and even more cautious when borrowing money to invest. It is risky and often unwise to borrow money you may not be able to pay back. Not only can you lose your home, car, or be evicted, it can ruin your credit score.
If you have borrowed money to purchase crypto, financial experts recommend selling enough crypto to pay back the loan. This way you don't risk defaulting on it. Crypto can be a good way to diversify your investment portfolio, but investors should be careful that they don't overexpose themselves financially and put all their eggs in one basket.
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing The Ascent's best personal loans for 2022.
David S. Chang, ChFC®, CLU® is an award-winning entrepreneur and financial planner with over two decades of experience in the personal finance space. He is a graduate of West Point and a Lieutenant Colonel in the Army National Guard. He has an MBA from the UCLA Anderson School of Management.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
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