The cryptocurrency space should reach 1 billion users in 2030. While some are known to make a fortune out of it, others have ruined their finances, pursuing similar results, going so far as to get credit to buy crypto by pledging valuable assets, including their homes.
Borrowing to invest can make sense under very specific conditions, but taking out a mortgage is also extremely risky. For example, this means that an investor’s house is lent as collateral.
Cryptocurrencies have in the past delivered spectacular results for investors, but have also seen them pass long bear market periods in which many lost hope and sold at a loss, those who managed to hang on to reap the biggest rewards. As any analyst or financial advisor would say, past results are not indicative of future results.
When bitcoin (BTC) was trading at $57,000, MicroStrategy CEO Michael Saylor suggested investors use all their money to buy Bitcoin and “figure out how to borrow more money to buy Bitcoin.” At one point, Saylor suggests that they should “go mortgage their house” to get more BTC.
Never forget Michael Saylor encouraging unsophisticated investors to liquidate all assets they own to buy leveraged Bitcoin.pic.twitter.com/Wvv3c2JpOZ
—Nate Anderson (@ClarityToast) June 13, 2022
As of this writing, Bitcoin is changing hands near $23,000, meaning investors who followed Saylor’s words would now be deep under water. MicroStrategy has took out loans of Silvergate Bank and raised capital by issuing debt to buy more Bitcoin, to the point that he now holds 129,698 BTC.
Although business loans differ from personal loans, it is important to understand what can happen when investors borrow against their assets to buy more crypto and what awaits them.
Be cautious in a high-risk environment
Mortgaging a house to buy cryptocurrencies has been a strategy employed by some investors, one that, if done at the right time, could result in significant returns. However, this could have disastrous consequences if done at the wrong time.
Speaking to Cointelegraph, Stefan Rust, CEO of inflation-tracking platform Truflation, noted that this is “definitely a high risk strategy” which is “always an alternative” as it is a “reasonable and cheap source of capital”. Rust added that if the mortgaged house is paid off and there are “residual assets available to take out a mortgage, then why not leverage that mortgage to buy Bitcoin.”
The CEO referred to fintech startup Milo, which offers 30-year crypto mortgages and allows users to leverage their cryptocurrency holdings to purchase optional real estate, and added:
“I personally wouldn’t go out of my way to ‘maximize’ by putting all my earnings into Bitcoin. It’s basically putting all your eggs in one basket. This is a very high risk capital allocation.
Rust added that for investors with families to support and bills to pay, mortgaging their property “may not be the most recommended strategy.” In his words, it’s “usually best to deploy common sense and proper risk management.”
Dion Guillaume, Global Head of Public Relations and Communications at Crypto Exchange Gate.io, explained Rust’s talk, telling Cointelegraph that “the easiest way to go broke is to play around with shitcoins and try to time the market” and told investors to “never overuse”. leverage” and instead “dominate” their greed.
Guillaume said investors should avoid falling into the hype, and while “it can be difficult in crypto, discipline is key.” Commenting on using assets to buy more BTC, he advised caution instead of going all-in as Saylor suggested:
“We need to be more careful in how we use our money. Despite all its greatness, crypto remains a high-risk asset. Are you a billionaire with seven houses? If so, you can probably mortgage one to buy BTC. Otherwise, be smarter.
Speaking to Cointelegraph, Dennis O’Connell, chief technology officer and portfolio manager at crypto wallet company Peregrine Digital, noted that borrowing to buy crypto is a “textbook case of what it never has to be done with your finances,” because a “home is a great long-term investment and one of the main ladders to building wealth.
O’Connell added that he had read “too many articles about families being destroyed or people who tragically took their lives doing this”. He added that one should never take loans or use leverage to invest in Bitcoin if they cannot afford to lose.
Cryptocurrency markets are notorious for being extremely volatile and filled with significant ups and downswhere the main assets can almost double in a month and bear markets can see BTC lose more than 80% of its value.
expect the unexpected
Due to the inherent volatility of the cryptocurrency space, O’Connell noted that investors should consider that Bitcoin is affected by monetary policy in the same way as other assets and has “demonstrated not to be an inflation hedge” while being highly correlated with other risks. assets.
The portfolio manager suggested that investors should expect the unexpected, especially when using leverage:
“They should expect the unexpected. Crypto market cycles are very volatile. Depending on their local regulations, they may try to buy some protection by hedging perpetual futures contracts (not yet legal in United States) to reduce their risk.
In his words, the volatility in risk assets seen amid rising interest rates makes it difficult to “justify borrowing against any traditional or crypto asset and going into Bitcoin.” Addressing suggestions that investors might borrow to buy crypto, O’Connell said they should be “very skeptical and always question the motivation of the source” when telling them to borrow.
He added that the cryptocurrency space is known to be filled with scammers and is heavily influenced by investor sentimentand as such, caution is called for.
Thomas Perfumo, head of trading operations and strategy at cryptocurrency exchange Kraken, told Cointelegraph that there are educational resources that “everyone should read” before using leverage to trade. buy cryptocurrency.
Perfumo noted that leverage is generally a tool used to maximize the return on capital and, in some cases, exploit it in a tax-efficient manner while increasing the risk profile of the transactions in which it is used. This means that it is “important for anyone looking to use leverage to understand their risk tolerance and manage their risk effectively”.
With any risky asset, Perfumo said, investors should never invest more than they are willing to lose, concluding:
“When making important financial decisions, it’s important for everyone to consider their personal risk tolerance and financial goals. We often recommend people consult with advisors to determine the most appropriate investment strategies.
These important financial decisions should also include the composition of the the potential crypto wallets of investors and their role in their overall investment portfolio. For investors who invest more than they can afford to lose, exposure to crypto can seem like a nightmare.
React to leveraged positions gone wrong
Guillaume said that investors who have a leveraged position in the cryptocurrency space need to consider how long they can afford to hold them because given enough time they can continue to hold them and hope their “fortunes turn”.
Guillaume said leveraged traders should use a bull market to turn crypto into cash when they break even so they can pay off their debts and promise themselves never to mortgage their house for crypto again. .
O’Connell said investors underwater on a leveraged position should “immediately seek the advice of a licensed financial planner and expert to structure a plan.” Mental health, he added, should not be overlooked:
“They should also take care of their mental health and seek help from licensed therapists or mental health professionals. They need to know that there is professional support, both financial and mental.
Ultimately, investors must recognize that cryptocurrencies are risky assets based on technological innovations. Things can change overnight, because collapse of the Terra ecosystem and subsequent contagion to other businesses has been clearly established.
To stay safe, investors need to manage their risk appropriately, which can mean their portfolios will be “boring” for a while. However, this “downtime” can give them the break they need to heal mentally and improve their outlook.