An unlucky cryptocurrency speculator has revealed how he borrowed and lost a six figure amount by trading cryptocurrencies. Last week, Reddit user Crypthomie from Abu Dhabi posted a photo of his monthly repayment schedule to service a bank loan which he used to speculate in cryptocurrencies. The bank document outlined monthly repayments of around 8200 Dirham (USD3,000) until December of 2021 to pay back the loan of 338,000 Dirham (USD126,000).
In the Reddit thread, the unfortunate crypto investor mentioned that he had bought Neo, Stellar, Litecoin and Ethereum. Since the all time highs seen in early January, Neo has lost around 90 percent of its value, while Stellar is down about 75 percent, Litecoin around 85 percent and Ethereum 80 percent.
The Reddit User stated in the thread that he has lost 85 percent of his crypto portfolio, and stated that he hoped his post would provide an important lesson for new crypto investors.
So what are the lessons which can be learned from this investor’s disastrous story? Investing in cryptocurrencies is unbelievably risky. This probably goes without saying, however it’s risky for reasons which most investors fail to consider. Cryptocurrencies are unlike almost all other traditional investment vehicles in that they operate largely in an unregulated environment. Most investments involve some sort of legal structure which gives the investor recourse in a court of law in the event they are defrauded. Usually contracts and disclosures which clearly define the nature of the investment product are read and signed. Most, if not all investments outside of crypto involve trusted third parties such as banks, brokers, and trading exchanges all of which have ethical terms of service. These entities are also heavily regulated by consumer protection laws.
However, in the world of cryptocurrencies, the token creators and issuers, wallet developers, and even some exchanges operate outside of any financial regulation. In many cases, the token creator and exchanges are based in foreign regions outside the jurisdiction for the investor’s regulatory authorities. This lack of regulation and legal framework in these crypto investment vehicles is what is often overlooked.
Adding to the risk of investing in an unregulated environment, the currency required to purchase cryptos, usually Bitcoin or Ethereum, and the crypto investment itself, are all bearer assets! And compounding this risk factor, cryptocurrencies are not traditional bearer assets such as bearer bonds or gold bars, they’re digital products. This means that in order to reduce the risk of digital theft, a solid understanding of computers and potential online threats is required.
Assuming that an investor understands these risks, next comes performance risk. An investment in a cryptocurrency, in particular an ICO, requires trusting the competency of the development team in their ability to successfully create and maintain the coin’s network. In the case of ICO’s, this of course also requires trusting the honesty and integrity of the token creator to follow through with their marketed business plans.
The considerations above outline just how incredibly risky investing in cryptocurrencies actually is. Investing in a digital product which is a bearer instrument trading in an unregulated environment, using exchanges which are domiciled in foreign jurisdictions is as risky as it comes. It really isn’t even an investment, it’s pure speculation!
A casino patron is much more likely to be treated fairly and ethically than a cryptocurrency speculator. However, the lure of humongous gains in the crypto world continues to attract new speculators to the space. The past twelve months has seen both massive moves up and down in the prices of cryptocurrencies. The market depth of many cryptocurrencies is very thin, meaning that violent moves in both directions are quite common. This is just another reason why it’s ill-advised to borrow money to speculate in the crypto market. Most rational people wouldn’t borrow money to gamble at a casino, so perhaps the biggest take away from this Reddit user’s story is to only bet what you would be willing to lose at a casino. In taking some advice from the slogan of the Gambling Helpline “Bet with your head, not over it.”