Thanks to the recent Bitcoin craze, more and more people are getting into the world of cryptocurrencies every day. This results in an influx of dumb money – investments from people who do not do any research prior to investing and are putting in money simply because “their friends told them to” or because they want to “get rich quick”. As if that weren’t bad enough, some investors even go as far as to use borrowed money for trading.
Based on a research by LendEDU, a personal loan research firm, more than 22 percent of Bitcoin investors were using borrowed money for trading purposes. In the study, 672 active Bitcoin traders from all around the world were asked the method they used to fund their daily trading activities. As a result, most of the participants revealed that they had funded their trading accounts with banking systems such as credit cards and ACH transfers.
However, alarmingly, more than 22 percent of the participants admitted that they have yet to pay off their credit card bills after buying bitcoin. In other words, these people were spending more than they could afford by investing in cryptocurrency with borrowed money.
Below is an excerpt from the survey report:
“The wisest and most frugal way to fund a virtual currency exchange account would be through an ACH transfer, which is completely free of charge. Only 18.60 percent of our 672 Bitcoin-invested respondents were paying for the cryptocurrency in this fashion.
However, this was not even the most pressing concern coming from the LendEDU poll. That recognition belongs to this data-point: 22.13 percent of Bitcoin investors did not pay off their credit card balance after purchasing Bitcoin.”
Nevertheless, the results of this research might be inaccurate as the 672 participants who were surveyed are just a tiny fraction of the millions of people who are invested in cryptocurrencies. Binance, the world’s largest cryptocurrency exchange, reported that it has been adding over 250,000 active users on a daily basis.
Even Coinbase and Bitstamp have been adding more than 100,000 active users every day, and as of now, Coinbase has over 10 million daily active users.
Thus, the 672 participants interviewed by LendEDU is too small a number on the grand scale of things for us to generalize the findings to the global cryptocurrency market. Nonetheless, the warning signs are real – the habit of ‘investing more than you can afford to lose’ is prevalent in the crypto world.
Only invest what you can afford to lose
In June 2017, Bitcoin and security expert Andreas Antonopoulos stressed in a tweet that he only invests as much money as he is willing to lose. According to Antonopoulos, the volatility of the cryptocurrency market, as well as the significant risk involved, begs for caution when it comes to investing your mortgage/entire life savings.
Yes, I own a few different crypto assets as part of a small but diversified portfolio. I only risk as much as I'm willing to lose.
— Andreas M. Antonopoulos (@aantonop) June 13, 2017
Although the total market capitalization of cryptocurrencies is slowly but surely approaching the $1 trillion mark, which no doubt adds to its credibility, one cannot deny that the market is still fairly young and unpredictable. By investing the amount of money that you are willing to lose, you are making sure that you don’t go into debt if anything happens to the cryptocurrency market.