“I thought taking out a loan to invest in crypto was a good decision. Then I lost most of it

Is it a good idea to take out a loan to buy crypto? Almost a quarter of American investors seem to think so.

A recent survey by DebtHammer, which surveyed 1,500 investors across the United States, found that 21 percent of investors said they have used a loan to pay for their crypto investments.

These loans were often at exorbitant rates, with personal loans among the most popular choices. Of all the people who said they had taken out a cryptocurrency loan, 15 percent said they used a personal loan.

According to the report, other methods of financing crypto investments came from payday loans, mortgage refinancing, equity loans, real estate loans and funds left over from student loans.

The survey also highlighted that around 10 percent of people who used payday loans used it to buy crypto: most borrowed between $500 (€503) to $1,000 (€1,007).

But why do so many people turn to loans to fund cryptocurrency investments in the first place, and is it a sensible way to shore up your finances? Some have been successful in doing so; others are not convinced that it is the right decision.

Take out loans to pay for crypto

A graduate from Leeds, England, who wished to remain anonymous, told Euronews Next that they used a payday loan to buy £600 (€712) worth of Bitcoin earlier this year.

“At the time I thought it was a good decision,” they said. “But the price kept falling – I lost a significant portion of my investment.”

Data from DebtHammer shows that this is not an isolated problem.

Nearly 19 percent of respondents said they had struggled to repay at least one bill due to their crypto investment, while 15 percent noted that they were worried about eviction, foreclosure or car repossession.

However, others argue that if loans are used wisely, investing in crypto can be a viable option.

Aaron Griffiths, from Chester, England, took out a £6,000 (€7,117) personal loan to pay for a £4,000 (€4,745) vet bill – the rest he invested in the various digital currencies: Digitbyte, Bax, Telcoin, Solana and Opulous and a number of NFTs.

“The loan term is six years; I’m sure I will have drawn enough profit to at least cover the interest by then… maybe more,” he told Euronews Next.

He notes that he deliberately took out a larger loan to secure lower interest rates.

“I could have put the money [left over from the vet’s bill] back into the loan straight away, but at that point it made more sense to put it into something that has done well before and see what happens,” Griffiths added.

That said, he emphasizes that he made the decision with enough money to spare in case the market crashes.

“I wouldn’t do anything that stupid,” he said. “Repaying the loan is not a problem for me anyway – luckily I have a reasonably good income.”

Since making the investment 12 months ago, Griffiths notes that his profits are currently down “but marginally”.

“I haven’t lost anything in the grand scheme of things,” he continued. “There were times when I could have walked away with a profit.”

Asked if he would encourage others to do the same, Griffiths notes that it really “depends on whether they have a plan. I personally wouldn’t borrow to just invest – you’d hate the repayments if you lost the money”.

Cryptocurrency offers a solution for those with low credit scores

Cryptocurrency platforms also allow users with low credit scores to borrow money in a less regulated way.

A person who wished to remain anonymous told Euronews Next that he has used the cryptocurrency platform Binance to borrow money as a way to circumvent traditional banking regulations for buying a car.

“I have about $5,000 in savings [€5,017], but due to a number of reasons, I had to go on a debt repayment plan. This meant my credit score was literally zero and no one would lend me money, he told Euronews Next.

“Even with savings, a traditional bank won’t let me borrow against it, and it has no chance of increasing in value since interest rates are so low”.

Using Binance, he was able to borrow 70 percent of the loan-to-value (LTV) and then stake the money to pay the interest.

“In four months I have paid $4 [€4] in interest and paid back 50 percent of the loan,” he noted.

“Where else would I be able to take out a loan that helps pay back my own interest and use current savings as collateral?

“I did this at a time when the market was very low, so as prices go up, I will also benefit from my investment increasing”.

There are of course risks to this strategy, he notes that the market is highly volatile – as seen in the recent crypto crash.

But “the worst-case scenario is that his stock gets liquidated. It’s no worse than having to use my savings to buy a car anyway,” he said.

Can financial literacy and crypto education prevent debt?

Although there are some circumstances where borrowing money to invest in the crypto market can be profitable, data shows that it often leads people into financial difficulties.

So why do people make the decision? According to Dr Konstantinos Stylianou, professor of competition law and regulation at the University of Leeds with a focus on digital markets, this is because “the vast majority of people are financially illiterate”.

“I don’t think it’s a good idea [to invest in crypto with a loan]. I think people should be much more careful about how they invest; Taking on debt is risky,” Stylianou told Euronews Next.

“This is precisely why we want to regulate crypto,” he continued.

Stylianou argues that regulating crypto would protect customers by giving them more understanding of what they are investing in – especially if it involves taking on debt to finance the investment.

He compares the lack of education and regulation about investing in the cryptocurrency market to mortgages and other loans — where people are required to go through an in-depth video or read a series of articles about what individuals are signing up for.

With the crypto market becoming more and more accessible, the lack of education in crypto markets and financial literacy in general can lead some to invest in bad decisions.

“It’s part of a regulator’s role to protect customers – at least what regulators want to ensure is that customers get more information,” Stylianou added.

“I appreciate that part of the appeal of crypto is the crazy returns — as well as the librarian and the non-traditional financial system, not managed or controlled by big banks,” he noted.

“I can see how people are attracted to this form of investment. People are free to choose what kind of investment profile they want for themselves: they can be as risky as they want.

“But I think the biggest risk with cryptocurrency is that if people are normally financially illiterate, which they are, they are ten times less informed about what cryptocurrencies are, how they work and how they are valued – and therefore what the future prospects are,” concluded Stylianou.

“I don’t really think it’s a good idea to invest more than people can afford to lose, including taking on debt”.