A Reddit post caught the attention of the cryptocurrency community in May 2017 when an anonymous user claimed to have taken a $325,000 equity loan on his residence to purchase bitcoin.
Rash of Volatile Purchases
At that time, bitcoin was trading at around $2,000 per coin. Naturally, this decision was considered to be a precarious endeavor that had as much chance of failure as it had success. In hindsight, however, the price of bitcoin has multiplied and with it, so has that initial investment. Regardless of whether that particular individual’s story was fiction or not though, it warrants a genuine discussion.
According to Joseph Borg, an American financial regulator, the Reddit post is no longer an isolated case, especially as bitcoin’s price continues to peak every other day. Borg is the director of the Alabama Securities Commission and offers a significant amount of financial expertise, even in the cryptocurrency space.
According to him, people who otherwise lack the financial stability to purchase cryptocurrencies are now taking mortgages to buy them.
Borg’s assertion is also a frightening premise for the future of the digital assets, especially as a variety of problems already plague the market, including but not limited to volatility and speculative skepticism.
Another important consideration is that a government is more likely to take measures against something that has directly caused a loss to its most vocal citizens.
Rising Value and Speculation
In the case of traditional loans, applying for additional credit to pay off a previous debt would be quickly noticed by any issuer because of the standardization of a national credit history.
Bitcoin and other cryptocurrencies are not bound by the same restrictions though, as interested parties can easily purchase digital monies with a credit card at a cryptocurrency exchange like Coinbase.
Going purely by the digital currency’s performance over 2017, it is somewhat easy to see why a new investor could be lured into a sense of false security. It is easy, after all, to hold the belief that the value of bitcoin will continue rising indefinitely.
More realistically, however, it is entirely possible that the cryptocurrency ecosystem could soon experience a bear market. A similar event occurred between 2013 and 2015 following the collapse of Mt. Gox, the world’s largest bitcoin exchange at the time.
If something similar happens, a lot of new investors will rush to sell their holdings, potentially at a significant loss, finally leaving them with a debt that they cannot possibly repay in the expected time frame.
Ardent supporters of digital currencies, in general, will understandably deny that the cryptocurrency market is currently a bubble. But if the majority of investors suddenly have debts to pay, it is unlikely they will hold their assets in bitcoin, ether or litecoin.
Such a sudden, unidirectional shift of wealth from cryptocurrencies to traditional fiat would also cause irrevocable damage to the identity of digital assets and could go on to prove, with almost absolute certainty, that the entire market was indeed a bubble all along.