Just a few weeks ago when the price of Bitcoin crashed, one of my friends mentioned that he was considering taking out a loan to buy more Bitcoin since it was ‘discounted’.
In my opinion, his plan is unreliable.
When Taking Out A Loan Can Be a Good Idea
On the one hand, this idea is reasonable considering the possible decent returns of high-risk investments. Depending on the country and the particular case of the borrower, the loan interest is typically lower than the expected opportunity rate of the crypto investment. There’s just one thing to keep in mind – you need to know how to assess your investment risks.
Take, for example, professional traders. They use loans to trade on a regular basis as the price of the loan capital is lower than the price of the personal capital. However, they are trained (at least, they should be) to work with these financial calculations. And trying to do something similar without special knowledge is a bad idea.
Obviously, my friend was not the first person throughout history who had thought of borrowing money to then invest it later. This idea has been analyzed and practiced for a long time.
Basically, it is common practice for a company to operate with two forms of capital: equity capital and debt capital. Together they form a capital structure. Finding the ideal balance of equity and debt is the key to success but it’s not an easy thing to achieve. If you want to know more about how this works, I recommend reading ‘Corporate Finance for Dummies’ by Michael Taillard.
Would you take out a loan to visit a casino?
Getting loans to invest in cryptocurrency is similar to gambling. You might think you have a good deal of luck when the price of your assets starts rising, but once the coin’s price crashes you’ll have to deal with consequences.
It is very possible that you’ll lose your investment due to volatility. Losing money sucks, but filing for bankruptcy is even worse.
When you take out a mortgage or a student loan, you know that at least in the end you’ll have a house or diploma. With crypto, nothing is promised.
That’s why evaluating the risk of your investments is a crucial rule of finance.
Save Up and Be Consistent
So why don’t you start small? Nobody said you have to buy 1 BTC straight away. The secret is in being consistent.
Instead of buying a cup of coffee every day, you can purchase $60 worth of crypto per month or $720 a year. Think of other unessential things you’re ready to give up and your investment capability will surprise you.
Invest in Yourself
If you want to invest wisely, do not focus on one thing and think bigger. Take online courses, read books, study, and accumulate knowledge. If you do so systematically, soon you’ll discover new ways of making and multiplying money. After all, investing in yourself is the best investment.