A golden rule of investing is you never borrow money to invest.
This practice, known as leverage or gearing, involves using borrowed money to boost the returns from an investment.
Leverage also boosts the risks involved, as losses are magnified too.
A new study has found that almost two-thirds of cryptocurrency speculators have borrowed money to make their purchases.
The study from KIS Finance found that crypto gamblers were borrowing money to speculate on price movements rather than using existing savings or income.
Overall, 64% of those who have put money in cryptos used one or more credit facilities to raise the cash.
Younger speculators were most likely to borrow to fund their crypto habit, with 70% of 18 to 24-year-olds doing so.
By comparison, only 25% of people over 65 borrowed to back cryptos, suggesting that experience and understanding of investing risks come with age.
Credit facilities used to speculate on cryptocurrencies were dominated by credit cards, with 35.5% of crypto gamblers overall taking out money on their credit card for this purpose.
19.3% said they funded the purchase of crypto from their bank overdraft.
Holly Andrews, Managing Director at KIS Finance, said:
“In recent years, cryptocurrencies have become far more mainstream with massive companies like PayPal now introducing cryptocurrency trading.
“Although cryptos, and specifically Bitcoin, have seen people make thousands or even millions in profit; they are incredibly volatile and can see investors losing massive percentages of what they put in very quickly.
“It’s concerning that so many people have turned to borrowed funds to purchase cryptocurrencies as they are incredibly volatile and offer no guarantees that the money invested will be returned. So, if people are spending money that they don’t have, and losing it, this could cause some serious financial challenges later down the line.
“The biggest concern is whether people will have the ability to pay the money back. With a very strong possibility of losing the money for good, people may be left severely out of pocket and racking up interest on their credit cards and overdrafts. Also, some credit card providers will view this type of transaction as a cash advance, meaning a cash advance fee and higher interest rate will be applied.
“So, if you are thinking of making an investment into cryptocurrencies, you should only invest an amount of money that you can afford to lose and it should be funded through income and/or savings rather than a credit facility.
“Borrowing money to invest in cryptos can become a very vicious cycle that’s difficult to break. Once you start losing money, it can be very tempting to invest more to make the money back; especially if you don’t have other means of paying the money back.
“Great care should be taken when you invest money anywhere, but especially when it’s something as volatile as cryptocurrencies. If you can, seek some 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.”
