Dont Get Into Debt To Buy Bitcoin – Our Advice
20th December 2017
Bitcoin has been hitting the headlines this winter as its value continues to soar. But the cryptocurrency doesn’t come risk-free, and many people have been taking on debt to invest in this volatile financial trend.
What is Bitcoin?
Bitcoin is a digital currency created in 2009 by an individual or group working under the pseudonym Satoshi Nakamoto. The motivation behind bitcoin’s development was to create a universal currency which would avoid the complications of currency exchange and inflation, as well as allowing people to make purchases anonymously.
Bitcoin was also designed to be more efficient than other systems of electronic payment, by enabling ‘peer-to-peer’ exchanges – transactions without an intervening third party, such as a bank, having to authorise the payment. Bitcoin can be bought with physical currency, and spent online using a computer or smartphone.
The price of bitcoin has been dramatically rising over the last months, soaring from $1,000 at the beginning of the year to its current value of $19,000. In other words, bitcoin prices have increased by over 1,000% over the course of the year.
This growth is volatile, however, as demonstrated by the dips it took in both July and September. The introduction of competing cryptocurrencies, such as litecoin, also poses a threat to bitcoin’s potential ubiquity. Founded in 2011 by Charlie Lee, litecoin is also a decentralized means of peer-to-peer transactions. Like bitcoin, its value has spiked recently, showing growth of 8,000% compared to this time last year.
Why has bitcoin become so valuable?
It is impossible to pinpoint exactly why bitcoin’s value has soared to such an extent throughout 2017, but it is likely that this is partly down to the changing way that people are viewing the currency. Bitcoin was originally designed to ease digital transactions, but as more and more people started using bitcoin, the networks processing these transactions became clogged, and slower than traditional digital payments at times. In this atmosphere, keeping bitcoin as an asset rather than using it for day-to-day spending became a popular trend.
The more confidence that speculating investors had in bitcoin, the more popular it became, continuing the cycle. A widespread belief that the currency’s value will continue to rise seems to be a self-fulfilling prophecy for the time being.
Angela Walch, a professor of law at St Mary’s university in Texas, has compared bitcoin’s boom to the dotcom bubble of the late 1990s. Investors bought into online businesses following the advent of the World Wide Web, with the expectation that these companies would continue to grow, only to see swathes of them collapse. Because its value has proven so volatile in the past, the financial journalist, Michelle Singletary, even stated that buying into bitcoin was “more akin to gambling than investing”.
Buying Bitcoin with Debt
One worrying side effect of the sudden enthusiasm for bitcoin is the lengths to which people are going to purchase the currency. Google revealed that searches for “how to buy bitcoin with a credit card” had spiked to an all-time high this month, suggesting that significant numbers of people are financing their foray into bitcoin with debt. If bitcoin’s value does continue its upward trajectory, these investors’ gamble could pay off.
However, this strategy is clearly a high-risk one, which could have far-reaching implications should the bitcoin boom turn out to be a bubble.
Angela Walch warns that should the value of the cryptocurrency suddenly fall, people will be unable to pay back the debts they used to purchase it. If this occurs on a wide scale, lenders themselves will be effected – as Walch put it, the effects “can just spiral through the system”.
Credit cards are not the only type of debt people are using to purchase bitcoin, though. Even more alarmingly, some are going so far as to put their homes on the line to pay for their investment. Joseph Borg, president of the North American Securities Administrators Association, has revealed that some Americans have been borrowing money against their homes in the hope of profiting from bitcoin investment.
Borg reports that some people have mortgaged their homes to finance this investment, risking unmanageable debt and the prospect of repossession and bankruptcy should bitcoin’s value fall. If people in the UK take similar risks to acquire the currency, this could worsen the country’s already high levels of unsecured personal debt.
This reached an average of £13,200 per household in 2016, prompting the TUC to warn that households were “running on empty”.
What risks are associated with Bitcoin?
Bitcoin is a volatile currency, and if you are considering investing, it should be approached with caution. Because bitcoin is still a relatively young technology, it does not have a long track-record of success, making it difficult to predict how it will perform in the future.
As well as this, because bitcoin is a purely digital asset, hackers are a risk, despite the tight and complex security measures in place. Finally, because bitcoin offers such anonymity in transactions, which do not require authorisation from a third-party, the currency is sometimes associated with black-market purchases.
Some figures of financial authority are highly sceptical of bitcoin. For example Jamie Dinmon, CEO at JP Morgan, even went so far as to call bitcoin a “fraud” earlier in the year.
Despite these risks, bitcoin clearly does have its benefits. As more and more of our business is conducted online it is likely that in one form or another, digital currencies will become increasingly prevalent.
Angela Walsh advises potential investors to only spend money which they can afford to lose – in other words, gambling responsibly – when it comes to this unpredictable and innovative currency.