My thoughts on investing with borrowed money
A recent report shows that approx. 18% of Bitcoin investors use credit to buy their Bitcoins (Bitcoin.com). Now it could very well be that these people are simply buying with their credit card and paying it off immediately, just because it's much faster and more convenient than bank transfer.
However, 70% of people who buy Bitcoins on credit say that "I believe owning bitcoin is worth the interest expense." This leads one to think that these people are racking up debt on their credit card and do not pay it off until they actually sell their Bitcoin holdings. Additionally, there is an increasing number of opportunities popping up enabling Bitcoin holders to take out loans against their Bitcoin (Bloomberg.com) Examples being Salt, Nebeus, CoinLoan and EthLend. This creates a potential situation where people will be able to borrow money based on their Bitcoin holdings, buy more Bitcoin, borrow again on the newly acquired Bitcoin and repeat.
By borrowing money to invest you can leverage your profits. Here's an example:
- I invest 1000 USD in Coin XYZ
- Coin XYZ goes up by 50%
- I sell and now have 500 USD in profit
- Profit is 50% of my investment
Now here's what happens if I borrow an additional 1000 USD (we'll ignore interest):
- I have invested 2000 USD in Coin XYZ, of which 1000 USD is my own money
- Coin XYZ goes up by 50%
- I sell and now have 1000 USD in profit
- Profit is 100% of my investment
As you can see, lending can be very attractive to amplify your profits (just imagine borrowing 10x more than your own investment). However, this leverage works both ways: losses will be amplified as well. An old investor saying is "never invest more than you can afford to lose". Now, how could you be willing to lose borrowed money?
This bull market will not last forever. Don't let crypto get you into debt.
As always, feel very free to reply, upvote, follow and/or resteem! :)
-longcat