Crypto fanatics take out loans to buy more crypto

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And they do it through crypto lenders.

Cryptocurrency enthusiasts seem to be reaching new heights of incredibly questionable and risky financial behavior every day. A recent example comes from the rise of lenders distributing loans to cryptocurrency junkies who, in turn, use it to buy more crypto.

Like a bank, crypto lenders take deposits to fund loans that use crypto as collateral, according to the Wall Street Journal. Loans can take the form of traditional fiat currencies like the US dollar or a stablecoin (a form of crypto that attempts to tie its value to a real world asset like the dollar). Unlike a bank, these crypto lenders are not FDIC insured. This means that if there is a security breach and all the money is taken, the depositors cannot get their money back.

Borrow crypto to buy crypto

While many use crypto lenders to help buy homes and cars, some also use loans to buy more cryptocurrency. For example, a 27-year-old man named Kris Kostadinov took a loan of $ 14,000 from Aave, a crypto borrowing and lending platform, and used it to buy ether as well as a variety of NFT. He said his loan funded investments now worth over $ 60,000.

If it was in a bank account, my money would only go down, inflation gnawing at it, Kostandinov told the WSJ.

It should be noted that a well-balanced portfolio of stocks and bonds with a simple asset allocation can be a perfect hedge against inflation. In fact, just investing in a fund that tracks the S&P 500 will usually give you a solid annual return that beats inflation. There is almost a century of data to show it.

Risky business

Obtaining a crypto loan comes with a number of huge risks. On the one hand, borrowing massive loans to invest in cryptocurrency (or really any other financial asset) is unwise. It’s really no different from borrowing money and then going to the casino. You hope to win but there is a big risk of losing. It is pure speculation and a recipe for disaster.

The volatility of the cryptocurrency also adds an additional risk factor. If the value of your collateral goes down, a crypto lender can make a margin call and take your money. Since crypto is notoriously volatile, there is a good chance that this will happen.

As with anything finance related, however, it’s good to just use common sense. Don’t take out massive loans to gamble. And maybe don’t waste your money on a bunch of sneaky NFTs while you’re at it.

READ MORE: Bitcoin to Bucks: Crypto Fans Borrow to Buy Houses, Cars & More Crypto [The Wall Street Journal]

More on Crypto: Edward Snowden Predicts Mass Adoption of Bitcoin by Governments

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