Should I Debt Finance My Cryptocurrency Investment?
“Wanted to pose a question regarding debt. So statistically about 80% of people in the USA carry a ton of debt. Very few people are debt free. I had always been taught that debt is an opposing force to any form of saving or investing. Yet many are rushing to play the crypto market. Clearly most having car payments, high credit card balances, loans etc. If you are burdened by payments, you clearly do not have disposable income. Is it in your opinion a good thing to invest when you're not debt free? I've even read comments about people having to borrow money just to "get in the game". At which point you're essentially gambling. Now, I'm not opposed to gambling....just not with the bill money. Your thoughts?”
I read this somewhere and also thought about sharing the question and my opinion with you.
To start with, let us look at marginable and non-marginable securities. ”A security is marginable if it can be traded on margin through a brokerage or other financial institution. Securities with high liquidity and market capitalization are more likely to be marginable.” And “Some classes of securities, such as recent initial public offerings (IPOs), over-the-counter bulletin board stocks, and penny stocks, are non-marginable".
The latter ones are non-marginable because the risk involved is too high although the reward can be greater. Cryptocurrency behaves more like the non-marginable securities. In my humble opinion, using your credit card to buy cryptos is pretty much like buying on margin. You are fully liable. Thus, I would not recommend anyone to do that just because of fear of missing out (FOMO). Nonetheless I would rather see someone buys cryptos using credit card rather than popping bottles at the club using the same card; especially if your working capital (current assets – current liabilities) is negative.
Some people argue that the wealthy people use debt leverage to finance their business ventures. Well, they are correct- but one thing, the wealthy people also do is that they add a layer of protection to themselves by forming a business which limits their liabilities. If the business goes belly-up and has to fold, in most cases the creditors has no recourse to seize their personal assets.
I am glad cryptocurrency has opened up the eyes of a lot of us about self-directed investment because most of us probably have a 401(k) at work that is being controlled/invested by a third party. The same thing you are doing in the crypto market, you can also do it in the stock market by trading derivatives (options) or FOREX. I doubt that Bitcoin price will double within the next 6 months. Furthermore, the capital outlay to acquire bitcoin can be prohibitive for most. Your return on investment (ROI) trading options as the potential of being greater than buying a token of Bitcoin. It will be a game changer when the exchanges start selling cryptocurrency derivatives for BTC, ETH, LTC. Perhaps with Goldman Sachs setting up a cryptocurrency trading desk to get in the game; everything and anything is possible.
At long last, the axiom remains true to never play with money that you cannot afford to lose, especially when your working capital is negative and when you are playing in a very volatile market and the risk is very uncontrollable. However, debt leverage is acceptable when you can control or manage your risk in a predictable environment. Live in a sense of anticipation.