Cryptocurrency fanatics seem to have hit another high of risky financial behavior. One recent trend shows the rise in handing out loans to crypto enthusiasts, who are using it to buy more digital currency. Just like banks, crypto lenders take deposits to fund loans that leverage crypto as the collateral, reports The Wall Street Journal.
The loans can come in the form of traditional fiat currencies such as US dollars or a stablecoin. Unlike a bank, these crypto lenders do not get insurance from the FDIC. That means in case of a security breach and all the money goes away, depositors won’t be able to retrieve their money.
Taking loans to buy more digital assets
While many use crypto lenders to buy homes and cars, some are using loans to purchase more cryptocurrencies. For instance, 27-year-old Kris Kostadinov took a $14,000 loan from Aave, a crypto borrowing and lending platform, and purchased ether along with several NFTs. He said that his loan-funded investment has now become more than $60,000 in worth.
“If it was in a bank account, my money would just be going down, with inflation eating away at it,” Kostandinov told the WSJ. It’s imperative to understand that a good investment portfolio in stocks and bonds with asset allocation can fine guard against inflation.
Crypto loans come with huge risks
However, there are huge risks that come along with the crypto loan. For one, taking huge loans to invest in crypto isn’t a smart decision. It’s similar to borrowing money and then using it for gambling. You hope to win but the risk of losing is massive. That’s totally luck-based and could be disastrous.
Moreover, the volatile nature of cryptocurrency adds another danger factor to the equation. If the collateral value drops, a crypto lender can enact a margin call and take your money. And, with cryptocurrency that’s very much likely. But cryptocurrency is not all bad. As per a new survey by Deloitte executives, digital assets are on their way to replace fiat currencies in the next 5-10 years, and banks should take notice of the fact.
