Research by DebtHammer found that 21% of investors used some form of borrowing to buy cryptocurrencies and many lost money in the process. FOMO and leverage.
FOMO – “fear of missing out”
O “fear of being left out” (FOMO) is a powerful feeling in the financial market, usually related to anxiety about missing a big opportunity. This feeling is often fueled by the investor’s greed and influential people around him. It is FOMO that causes many traders to buy an asset during a strong up move, with the false belief that the move will go on forever and “if you don’t enter now, you will miss your chance”. When investing in volatile markets such as cryptocurrencies, you need to be careful not to be deceived by your own emotions and understand that in most cases, no “chance is unique”. Volatility accurately describes the back and forth behavior of price, creating multiple opportunities during a cycle or trend.
Investors take out loans to buy crypto
DebtHammer’s survey polled more than 1,500 people in the United States and found that about 320 of those respondents (~21%) have at some point used loans to buy crypto.
“Have you ever borrowed or used debt to invest in crypto?”
The vast majority (78.63%) said they had never resorted to this type of leverage in their investments in this market, but just over a fifth of respondents, yes, have already used loans to buy crypto. 15.30% resorted to personal loan solutions with banks and financial institutions. The others sought, in order: Salary advance loans; Securities lending; home equity – using your property as collateral, as suggested by Michael Saylor on one occasion; Student debts and mortgage debt renegotiation. Of all the people who requested a salary advance from companies specializing in this service, 10% of them (one in ten) did so with the aim of buying cryptocurrencies. This type of debt normally bears interest of around 400% per year, creating an extremely unfavorable risk situation for the investor, with low proportional benefit.
Default and loss on loan to buy cryptocurrencies
Many of these investors reported that they failed to pay a personal bill and used the loan money to buy cryptocurrencies, in a scenario where most retailers ended their operations at a loss and had negative results.
Know more: BTC investors register the biggest loss realized in USD of the asset’s history Also according to the DebtHammer survey, 19% said they had difficulties paying their bills while investing and 15% said they were afraid of being evicted or confiscated from their cars, due to debts.
“Have you ever felt that you were at risk of eviction or vehicle confiscation thanks to a loan to buy cryptocurrencies?” – Source: DebtHammer Over 35% of respondents said they used a credit card to buy cryptocurrencies. While about 20% of them paid as soon as the bill expired, 14% said they were paying incrementally with an introductory offer of 0% interest per year or the full interest rate.
Leverage and risk management
The act of borrowing or buying assets with virtual money, through credit, for example, is called financial leverage. The leverage service is normally offered by exchanges and brokers in margin or derivative operations – in contrast to a spot market operation. Usually these applications are made by specialized platforms, with risk management tools, such as stops and bank management with a degree of leverage proportional to the investor’s portfolio and their cryptoassets guarantees. Many companies and investors have taken a hit on these leveraged trades during the current crypto winter. Some examples: Leverages are usually only recommended for experienced and professional traders, where even they can make serious mistakes, like the cases above. Leverage through non-specialized loans, with high interest, without adequate risk management tools, using basic necessities of personal property as collateral is extremely not recommended and can have very serious consequences for investors who expose themselves in this way. This behavior is usually caused by the feeling of FOMO, as explained at the beginning of the article and should be avoided. As we say a lot in the crypto market:
“You should invest the money from the pinga and not from the milk”.