- Trading with borrowed money is a bad idea in any market
- Crypto markets are notoriously volatile and you could easily lose your money or get scammed
- Using borrowed money also means you won’t be able to trade freely
Investing more than you can afford to lose, i.e. taking on debt to trade with, is a terrible idea in any market, but with the cryptocurrency markets it’s borderline insanity. Not only could you end up in debt and having nothing to show for it, the very act of trading with borrowed money adds a level of pressure to the activity that could cripple your chances of success.
The Potential of a Total Wipeout
The principle reason why you should invest with borrowed money is that you could easily end up with nothing but a debt to repay. This goes for trading as well as investing in crypto investment schemes – in both scenarios you could end up financially much worse off.
With regard to trading, which is entirely down to you and your acumen, a couple of bad trades could see your borrowed capital wiped out completely, or worse, owing money to an exchange if you have been liquidated. Even in a bull market you can experience a long or short squeeze that could liquidate you, leaving you needing to pay back the borrowed money with other funds.
If you plan to invest in a crypto investment scheme then you are leaving others in charge of your capital. As 2018 showed, even reputable crypto investment firms can lose money if they don’t entirely understand the market, and then of course there are the scams. The Countinghouse saga of last year illustrated that even legitimate-seeming companies can be scams through and through, or can overextend themselves and turn into badly run operations.
This would leave you servicing the debt of your borrowed money with nothing to show for it.
The Psychological Impact of Investing With Borrowed Money
The other reason why it’s a bad idea to invest with borrowed funds is because you won’t be as free with it. Trading consequence-free allows you to be less conservative with your trades as you won’t be worried about potentially losing the money – as the saying goes, scared money doesn’t make money.
Crypto is a speculative market, and if you are forced by necessity to play it safe thanks to trading with borrowed money then you will likely engage in fewer trades due to your fear of losing it. When you do go big you will find it hard to sleep at night as you know that there’s a chance you could lose everything on a speculative play. Either way, it’s not an enviable position to be in.
Don’t be Tempted to Invest With Borrowed Money
Trading with borrowed money is a high risk strategy that can easily leave you worse off, even when the times are good. Using money that you are open to losing is the only way to play the crypto game, otherwise you will not be in the right frame of mind to make the most of the gains possible in the crypto space and you could well end up servicing a debt you are not able to get the benefit of while others are walking off into the sunset with their winnings.