Cryptocurrency enthusiasts seem to reach new heights of incredibly questionable and risky financial behavior each day. One recent example comes from the rise of lenders doling out loans to cryptocurrency addicts who, in turn, use it to buy more crypto.
Similarly to a bank, crypto lenders take deposits to fund loans that leverage crypto as the collateral, according to The Wall Street Journal. The loans can come in the form of traditional fiat currencies like US dollars or a stablecoin (a form of crypto that attempts to peg its worth to a real-world asset like dollars). Unlike a bank, these crypto lenders aren’t insured by the FDIC. That means if there’s a security breach and all the money gets taken, depositors can’t get their money back.
Borrow Crypto to Buy Crypto
While many use crypto lenders to help purchase homes and cars, some are also using loans to purchase more cryptocurrencies. For example, a 27-year-old man named Kris Kostadinov took out a $14,000 loan from Aave, a crypto borrowing and lending platform, and used it to purchase ether along with a variety of NFTs. He said that his loan funded investments now worth more than $60,000.
“If it was in a bank account, my money would just be going down, with inflation eating away at it,” Kostandinov told the WSJ.
It should be noted that a well-rounded portfolio of stocks and bonds with straight forward asset allocation can be a perfectly fine guard against inflation. In fact, just investing in a fund that tracks the S&P 500 will typically give you a solid annual return that beats inflation. There’s nearly a century worth of data that shows this.
There are a number of massive risks that come with attaining a crypto loan. For one, borrowing massive loans to invest in cryptocurrency (or really any other financial asset) is reckless. It’s really not unlike borrowing money and then heading to the casino. You hope you win but there’s a big risk of losing. That’s pure speculation and a recipe for disaster.
Also the volatility of cryptocurrency adds an additional danger factor. If the value of your collateral falls, a crypto lender can enact a margin call and take your money. Since crypto is notoriously volatile, there’s a good chance that can happen.
As with anything finance related, though, it’s good to just practice common sense. Don’t take out massive loans to play the market. And maybe don’t blow your money on a bunch of shifty NFTs while you’re at it.
READ MORE: Bitcoin to Bucks: Crypto Fans Borrow to Buy Homes, Cars—and More Crypto [The Wall Street Journal]
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