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Inside the Bitcoin Debt Crisis

posted on 2018-03-12 by Mikaela Parrick

 

When the bitcoin bubble bursts, there will be quite a few investors in debt. According to Cointelegraph, about 22% of bitcoin investors used borrowed money to purchase bitcoin. People are even taking out mortgages to buy bitcoin, in addition to using credit cards and equity lines. This means there’s a lot of people accumulating a lot of “bad debt.” Bitcoin is still so new and unregulated that these individuals are taking huge risks to invest, hoping to strike it rich. Many people, including the founder of another popular cryptocurrency dogecoin, are predicting the bitcoin bubble to burst… and soon. So when the value of bitcoin tanks, there will be massive amounts of debt left behind. Some are even drawing parallels to the 2008 housing crisis because people took on huge amounts of debt with the expectation that the housing marketing would boom, only for the bubble to burst. People were left with too much debt and not enough assets to cover it.

What is bad debt?

Bad debt is debt that doesn’t increase your net worth, has no future value and that you don’t have money to back for. Some examples of bad debt are auto loans and credit cards. Good debt is considered an investment that generates long-term income or value.

How much debt is too much?

While any amount of debt is too much, there is an easy way to find out if your amount of debt is too high. A good metric to use is your debt-to-income ratio. To find this, add up all your monthly debt payments and divide that by your monthly gross income. Anything over a 43% debt-to-income ratio is a red flag to potential lenders. Learn more about bad debt here.

Can I invest in bitcoin without going into debt?

Yes! Here are a few words of advice to those interested in investing in bitcoin:

1. Buy only what you can afford

To prevent going into bitcoin debt, first we suggest only buying what you can afford. A good rule of thumb is that if you have to borrow, or you can’t buy the same thing twice, you can’t afford it.

2. Start with a small share

Bitcoin can be purchased in fractions for a cheaper price. Start small before spending all your hard-earned money.

3. Do your research

Bitcoin might not even be the smartest cryptocurrency to invest in. There’s a host of other options available, most of which are currently doing well. Research some other (possibly cheaper) options, like ethereum or litecoin.

4. Buy insured bitcoin

Insured bitcoin can be bought through Coinbase, which is better than uninsured. However, keep in mind that only 2% of Coinbase bitcoin is insured. Always read the fine print!

5. Buy low, sell high

Similar to the stock market mindset, to survive in bitcoin you’ll need to buy low and sell high. We realize this advice is a little too late, considering bitcoin was $500 a few years ago and is now in the tens of thousands, but it’s still good advice to follow nonetheless. This is where the gamble comes in. You never know when the price will fall or shoot back up, so prepare for anything.

6. Stay up-to-date on the market

If you’ve invested in bitcoin or any other cryptocurrency, you need to watch the value like a hawk and sell if you see the market start to tank.