Americans borrow money to buy crypto. Should you?

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Crypto prices have fallen. Should you borrow money to invest?

Important points

• Over the past eight months, the crypto market has lost over $2 trillion in value, down 60% from its peak.
• Major crypto funds and platforms have gone under and thousands of employees have lost their jobs.
• The stock market and the economy in general have fallen due to high inflation, supply chain problems, the war in Ukraine and more.

A recent survey shows that almost 1 in 4 crypto investors have taken out loans to invest in cryptocurrencies. Some have gone so far as to take out payday loans, which can have interest rates as high as 400%. With cryptos on a wild ride and the market down nearly $2 trillion from its highs, is it a good time to take out a loan to invest in cryptocurrencies?

Loans for cryptocurrencies

To take advantage of the rapid rise of the crypto market, many investors have taken out loans in the hope of making money. 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, mortgages and mortgage refinancing to buy cryptocurrencies. Loans are not the only source of funding for crypto investors. More than 35% have used a credit card with only 1 in 5 saying they pay their bill every month and 1% have max.

Investors who get into debt

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 and $1,000. With the average interest rate on a typical payday loan at 400%, the fees and interest you pay will likely outweigh any potential gain. The reality is that it will likely only put you further into debt.

Almost 1 in 5 stated in the survey that they have struggled to pay at least one bill due to their crypto investment. Of crypto investors who borrowed money just to invest, over 12% are worried about foreclosure, 6% about being evicted, and 9% about having their car repossessed.

Most people lose money

Unfortunately, the majority have lost money on crypto. Over 11% have lost more than $50,000 and only 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. Also, 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 crypto believe it is a good investment opportunity. This compares with around 50% of all respondents in the survey.

Should you borrow to invest in crypto?

When asked what made them decide to borrow money to buy crypto, over 40% of respondents said it was because of the sharp decline in crypto prices or because prices are historically low. Close to 20% borrowed because of a 0% promotional rate they were offered, and 16% believe crypto is a good investment.

Since peaking in November 2021, crypto prices have fallen 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 almost impossible to know if crypto has bottomed out. Buying the dip is a good strategy when price drops are temporary and over the long term prices continue to rise, but there is a chance that crypto prices will fall further.

Investors should be cautious about investing in a risky investment like crypto, and even more cautious when borrowing money to invest. Borrowing money that you may not be able to pay back is risky and often unwise. Not only can you lose your home, your car or get evicted, it can ruin your credit score.

If you borrowed money to buy crypto, financial experts recommend selling enough crypto to repay 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 not to overexpose themselves financially and put all their eggs in one basket.