The cryptocurrency space is expected to reach 1 billion users in 2030. While some have been known to make a fortune, others have wrecked their finances, chased similar outcomes, and gone so far as to get credit to buy cryptocurrencies by offering up valuable assets, including So their homes, as collateral.
Borrowing for investment can make sense under very specific circumstances, but using a home purchase loan is also very risky. For example, this means that the investor’s home is put up as collateral on the loan.
Cryptocurrencies have, in the past, delivered amazing results for investors, but have also seen them go through long periods in a bear market where many lost hope and sold at a loss, with those who were able to reap the biggest rewards. As any financial analyst or advisor might say, past results are not indicative of future results.
When Bitcoin (BTC) was trading at $57,000, Michael Saylor, CEO of MicroStrategy, suggested that investors use all their money to buy Bitcoin and “figure out how to borrow more money to buy Bitcoin.” At one point, Saylor suggests they “mortgage their house” to get more bitcoin.
At the time of writing, Bitcoin is trading near $23,000, which means that investors who followed Saylor’s words will now be deeply underwater. MicroStrategy has taken loans from Silvergate Bank and raised capital by issuing bonds to buy more Bitcoin, to the point where it now owns 129,698 BTC.
While corporate lending is different from personal lending, it is important to understand what might happen when investors borrow against their assets to buy more cryptocurrency and what is in store for them.
Being wise in a high-risk environment
Mortgaging a house to buy cryptocurrencies has been a strategy some investors have been using, and one that, if implemented at the right time, can lead to significant returns. However, it can have serious consequences if it is implemented at the wrong time.
Speaking to Cointelegraph, Stefan Rost, CEO of inflation-tracking platform Truflation, noted that it is “definitely a high-risk strategy” and is “always an alternative” because it is a “reasonable and cheap source of capital.” And if the home mortgage is paid off and there are “remaining assets available to be able to get a mortgage, why not take advantage of that mortgage to buy bitcoin,” Rost added.
Pointing to fintech startup Milo, which offers 30-year mortgages and allows users to leverage their crypto holdings to purchase real estate as an option, the CEO added:
“Personally, I wouldn’t do my best and ‘greatest’ by putting all my profits into Bitcoin. This is putting all your eggs in one basket. This is a high-risk allocation of capital.”
For investors who have a family to take care of paying the bills, mortgaging their property “may not be the most desirable strategy,” Rost added. According to his words, “It is usually best to spread common sense and appropriate risk management.”
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Dion Guillaume, Global Head of Public Relations and Communications at crypto exchange Gate.io, explained Rust’s words, telling Cointelegraph that “the easiest way to destroy is to play with Chetcoins and try to time the market” and tell investors to “never use exaggerated ‘leverage’ and instead “Control” their greed.
Guillaume said investors should avoid getting caught up in the hype, and while “this can be challenging in crypto, discipline is key.” Commenting on taking advantage of the assets to buy more bitcoin, he advised caution rather than getting into everything as Saylor suggested:
“We need to be more prudent in the way we use our money. Despite all this greatness, crypto is still a high-risk asset. Are you a seven-house billionaire? If yes, you could probably mortgage someone to buy BTC.” If not, be smarter.”
Speaking to Cointelegraph, Dennis O’Connell, chief technology officer and portfolio manager at cryptocurrency wallet firm Peregrine Digital, noted that borrowing to buy cryptocurrencies is “a typical case of what you never do with your money,” as “a home is a great long-term investment.” And one of the basic ladders for wealth development.”
O’Connell added that he had read “too many articles about destroyed families or people who tragically took their own lives by doing this very thing.” He added that one should never take out loans or use leverage to invest in Bitcoin if one cannot afford to lose.
Cryptocurrency markets are known to be extremely volatile and riddled with huge ups and downs, with leading assets potentially doubling nearly in a month and bear markets seeing BTC lose more than 80% of its value.