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.
Expect the unexpected
Because of the inherent volatility of the crypto space, O’Connell noted that investors need to keep in mind that bitcoin is affected by monetary policy in the same way that other assets are affected and has “proven to not be an inflation hedge” while closely related to other risky assets.
The portfolio manager suggested investors to expect the unexpected, especially when using leverage:
They must expect the unexpected. Market cycles in cryptocurrencies are highly volatile. Depending on their local regulations, they can try to buy some protection by hedging a perpetual futures contract (which is not yet legal in the US) to get rid of the risk.”
In his words, the fluctuations in risky assets seen amid rising interest rates make it difficult to “justify borrowing against any traditional or crypto asset and going for Bitcoin.” Speaking about suggestions that investors could borrow to buy cryptocurrencies, O’Connell said they should be “extremely skeptical and always skeptical of the source’s motives” and ask them to borrow.
He added that the cryptocurrency space is known to be riddled with scammers and heavily influenced by investor sentiment, and as such, caution should be exercised.
Thomas Perfumo, head of commercial operations and strategy at cryptocurrency exchange Kraken, told Cointelegraph that educational resources exist that “everyone should read” before using leverage to buy any cryptocurrency.
Perfumo noted that leverage is generally a tool used to maximize returns on capital and, in some cases, leverage it for tax impact.