We’ve been over this before, but apparently we’re going to have to go over it again, because now it’s popping up on mainstream financial media outlets.
A lot of people have gone out of their way over the past year to claim that Bitcoin (and cryptocurrencies in general) don’t pose a systemic risk to the financial system or to the economy in general. That may or may not be true and we don’t pretend to be the arbiter on the subject.
What we do know, however, is that in addition to the obvious risk posed by embedding cryptocurrencies into established markets via futures and other instruments, there are two ways in which cryptocurrencies could, in theory, end up posing a systemic risk:
- cryptocurrencies end up collateralizing loans
- people start borrowing to buy cryptocurrencies
You’ll not that those are just two sides of the same (bit)coin. In the first case, you already own cryptocurrencies and you’re borrowing against your unrealized gains and in the second case, you’re borrowing in order to speculate in cryptocurrencies. Either way, lenders end up (wittingly or, more likely, unwittingly) exposed to the vagaries of the cryptocurrency market.
Some companies are actively seeking to lend against crypto collateral – as in, that’s the business model. But one certainly imagines that other lenders are doing the same thing, only not intentionally. Here’s what we said in a post for DealBreaker last month about the distinct possibility that digital wealth generated by trading in Bitcoin and other cryptocurrencies is going to end up worming its way into the decision calculus for lenders:
Which brings me neatly to another question: how long is it going to be before people are effectively using Bitcoin as collateral? That is, if your net worth has just increased exponentially thanks to gains in cryptocurrencies, how long is it going to be before that gain starts getting factored in when it comes to securing lines of credit?
I mean obviously you’re not going to put an asterisk by your income that draws people’s attention to a handwritten footnote that says “this is subject to change depending on the price of make-believe space tokens that are so volatile I can’t even give you a rough estimate of where they might be trading without checking my phone”, so how are lenders going to know if this starts becoming an input in their models?
And speaking of models, Bitcoin, and inputs, do note that at least one bank (Nomura) is now factoring in unrealized crypto gains when projecting consumer spending trends in Japan.
In the same DealBreaker article linked above, we also posited a scenario wherein college students are using their student loans to speculate in digital currencies. That is not at all far-fetched. Recall this passage from a WSJ piece out last month:
Paul Joseph Spelce, a 22-year-old graduate student in New York, was one of the newcomers who bought in. Over Thanksgiving dinner with friends last week, the conversation was dominated by talk of bitcoin. “Even this woman who didn’t have a computer at home couldn’t stop talking about how bitcoin was going to reach $10,000 soon,” Mr. Spelce said.
Now I don’t know if Paul took out any student loans to pay for grad school, but what I do know is that he’s not the only college student in America buying Bitcoin. It is entirely possible (actually, we’ll go out on a limb here and say that it is a near certainty) that someone, somewhere is funding Bitcoin purchases with student loan disbursements.
Needless to say, that is about the last thing America needs as the country tries to figure out how to get out from under a student debt bubble that is now larger than the entire USD high yield market:
Ok, so that brings us to a survey we’ve mentioned before and which is (finally) getting some attention in the mainstream media. Earlier this month (and also last month), we cited a recent LendEDU poll of almost 700 active Bitcoin investors. One of the survey questions reads as follows:
1. Which of the following best describes how you funded your account to purchase Bitcoin?
The choices were: debit card, ACH transfer, wire transfer, credit card, and “other.” Well guess what? This:
a. 33.63% of Bitcoin investors answered “I used a debit card to fund and purchase.”
b. 18.60% of Bitcoin investors answered “I used the ACH bank transfer process to fund and purchase.”
c. 18.15% of Bitcoin investors answered “I used a credit card to fund and purchase.”
d. 16.22% of Bitcoin investors answered “Other.”
e. 13.39% of Bitcoin investors answered “I used a bank wire transfer to fund and purchase.
Nearly 20% of them bought their stake on a credit card. Here’s the visual:
As Bloomberg notes, “even beyond those surveyed, interest in buying bitcoin with a credit card has surged, according to Google Trends.”
See that spike? That coincided with Bitcoin’s 2017 high suggesting that people were probably putting Bitcoin on their credit card right before it careened lower by some 30%.
If you’re thinking about doing this, allow us to remind you that it is stupid enough to invest in traditional assets when you have existing credit card debt (you’re better off paying off the credit cards to get out from under the astronomical interest rate). Taking out a high interest loan to speculate in something that is, to quote Barclays, “15-25x as volatile as the S&P 500, 20x-40x as volatile as gold, and even 5x-11x as volatile as oil as measured by the coefficient of variation” is the very definition of insane:
But hey, fuck it right? No guts no glory.
Now we’ll know what happened when we start seeing banks increase reserves against write-offs for credit cards.