Investing is so unsafe it could now be classed as a form of gambling, The rise of crypto made it inevitable that the credit market would get involved. Now, it’s the new boogie man for pundits, and crypto loans are “popular in the market”.
The credit market drove the 2008 crash. It smashed American investors, and nobody’s learned much since. Crypto is barely regulated at all. The courts may or may not be able to help you if you get in trouble with a loan.
Motley Fool has produced a useful if upbeat fact sheet about crypto loans that spells out how these things work. I’m not so sure, though. I intensely distrust the crypto market, let alone its relatively sudden outreach to borrowers.
Why would you take out a crypto loan at all? What’s wrong with an ordinary loan? What happens if the crypto you borrow crashes or rises suddenly? These are “no check” loans, with no scrutiny of borrowers or lenders.
The risks aren’t at all clear. It’s unclear how badly screwed a borrower could get with one of these loans. This seems a bit disingenuous, even for the credit market.
To be strictly fair Motley Fool’s article says:
Loans are an opportunity for passive income. This presumably means you can make money if your crypto goes up. You lose if it goes down.
Access to liquidity without selling assets. Ah, maybe. What happens if the borrower defaults? Do they hold a séance?
Let’s assume all this is on the level. Crypto values often change spectacularly. There’s little warning. Do borrowers know enough about the risks? How could they? Even the experts are regularly caught off guard by good old Bitcoin having a random sneeze.
I’m extremely wary of the “passive income” theory. These aren’t bonds or Mom and Pop types of investments. Some cryptos don’t move much at all. They’re the junk bonds of the crypto market. People do make big money out of crypto, but they tend to be major investors, who can make a lot out of a few cents worth of upside.
Access to liquidity is a meaningful selling point. On that basis, if the loan is OK, it makes at least some sense. The ability to make money out of a loan shouldn’t be dismissed, either.
That is actually quite a good idea. It’s a bit like the futures market where you buy at $X and if it goes above your borrowing price, you win. Not many people make money out of borrowing.
If you borrow $1000 worth of crypto worth $1, and the crypto goes up to $2, you double your money minus the original loan. Not bad.
What’s lacking is proof. I don’t see too many people saying they took out a crypto loan and became super-rich.
Crypto loans will have to prove themselves in the market. Till then, sit tight.
