A study by KIS Finance found that more than two-thirds of cryptocurrency investors borrowed money to make their purchase, rather than using their income and/or savings.
Overall, more than two-thirds (64%) of those who invested in cryptos, used one or more credit facilities to do so. Although it might seem like a good investment strategy at the time, the prices of major cryptocurrencies have fallen 100% in the last month. This dramatic fall will leave many people facing huge losses, while still struggling with the cost of repaying their original loan.
Massive Crypto Losses in the Last Month
Cryptocurrencies are very volatile and are a risky investment strategy. There was a massive rise in crypto prices in November last year, with Bitcoin hitting its highest price ever. But since then, cryptos have been in decline.
The data below shows how seven of the biggest currencies have fallen in value over the past month.
Bitcoin – down 38%
Ethereum – down 52%
Litecoin – down 51%
Ripple (XRP) – down 70%
Dodge Coin – down 89%
Cardano – down 73%
Solana – down 105%
There are many examples of those who made their fortunes in the market, such as Ethereum creator, Vitalik Buterin, and Coinbase founder, Brian Armstrong, who became billionaires due to the exponential growth of the crypto industry. cryptocurrency over the past two years.
But, worryingly, the success stories of cryptocurrency may inspire many people, especially teenagers and young adults, to jump on the bandwagon and strike it rich. However, these success stories may not highlight the risk of cryptocurrencies as an investment product.
The difference if you invested in the biggest cryptos, Bitcoin and Ethereum, years or months ago
If you invested Bitcoin in February 2011 or Ethereum in 2016 when they were only worth $1, then you would be laughing now. But if you invested in Bitcoin or Ethereum last month, you would have lost about half of your investment if you sold now.
Some investors may hold on, but many might start to panic seeing their investment drop so much and sell to cut their losses, fearing losing it all.
For those who borrowed to make their initial purchase, the risk is that they will not only lose their investment, but will struggle to pay the credit they used to purchase it in the first place.
As the data shows, people between the ages of 18 and 24 were the age group most likely to use borrowed funds to make their investment, with a significant drop in borrowers in the two oldest age groups. .
The appeal of cryptocurrencies seems particularly strong with Gen Z (those currently under the age of 25), who are drawn to the decentralized nature of the market. But the fact that these markets are unregulated leaves little protection for investors. There are also fears that this generation may no longer be threatened by Crypto influencers, with quick stories that may encourage young investors to borrow money in hopes of generating big returns.
What type of credit facilities have people used to finance cryptocurrency investments?
When we break down the types of credit facilities people have used to buy cryptocurrencies, more than a third (35.5%) made their investment using a credit card. Nearly a fifth (19.3%) financed the buyout with their overdraft.
Credit card – 35.5%
Overdraft – 19.3%
Personal loan – 14.6%
Guaranteed loan – 9%
Payday loan – 7.6%
Remortgage – 3.3%
Holly Andrews, Managing Director of KIS Finance, said, “In recent years, the cryptocurrency industry has grown rapidly and cryptos are becoming a more mainstream commodity every day. Even tech giant PayPal has now introduced a cryptocurrency trading platform, making it accessible to everyone.
Although cryptos, and more specifically Bitcoin, have seen people make thousands, if not millions in profits; the past few months have shown that they are incredibly volatile and can see investors lose large percentages, if not all, of what they have invested very quickly.
It is disturbing that so many people have turned to borrowed funds to buy cryptocurrencies because they are extremely unpredictable and offer no guarantee that the money invested will be returned. So, if people invest money that doesn’t belong to them and later lose it, it could lead to serious financial problems later on.
The biggest concern is for those who cannot afford to repay the money, especially if their original plan was to repay their loans with the profits from their investment. With a very high possibility of losing money for good, people can be in dire straits and rack up interest on their credit cards and overdrafts. Additionally, some credit card providers will treat this type of transaction as a cash advance, which means cash advance fees and a higher interest rate will apply.
So if you are considering investing in cryptocurrencies, you should only invest an amount of money that you can afford to lose and this should be funded from income and/or savings rather than through a credit facility.
Borrowing money to invest in cryptos can become a very vicious cycle that is hard to break. Once you start losing money, it can be very tempting to invest more to get the money back. especially if you have no other means of repaying the funds.
You have to be very careful when investing money anywhere, but especially when it comes to something as volatile as cryptocurrencies. If you can, seek professional financial advice first and never invest more than you can afford. Buying cryptocurrencies should also not be your only form of investment or savings as there is very little stability – spread your investments out and treat cryptocurrencies as a smaller, fun investment.