Way Too Many People Are Using Credit Cards to Buy Bitcoin

A recent poll shows that nearly one-fifth of all Bitcoin buyers are using credit cards to fund their investments, likely paying hefty fees for the privilege. A large portion of those buyers then carry the balance instead of paying their cards off, implying that they’re highly leveraged – but confident that their investments will grow in value.

The findings come from a survey conducted by LendEDU, a student loan refinancer, in December. They conducted an online poll of the payment behavior of 672 active Bitcoin investors, and found that 18.15% of them bought the virtual currency with a credit card.

Of those, 22.13% did not pay off their credit card balances. Nearly 90% of those planned to pay off the balances by selling their Bitcoin investments, implying a firm faith that the cryptocurrency’s price would continue rising. LendEDU doesn’t indicate that the survey was scientifically randomized, but its large sample size, and use of two layers of screening to ensure respondents were actual Bitcoin buyers, gives credence to its findings.

The numbers are worrisome for at least two reasons. The main U.S. cryptocurrency marketplace, CoinBase, charges a 4% transaction fee for credit card purchases. For nearly any other form of investment, that fee alone would wipe out most of any reasonably-expected appreciation. In traditional investing, low expenses are a major factor in long-term success.

In other words, even credit-card Bitcoin buyers who pay off their balances immediately are throwing money away. And ironically, those fees go in large part to credit card companies themselves – the very intermediary institutions Bitcoin was invented to undermine.

But those carrying a balance after buying Bitcoin are even more troubling. Carrying a credit balance implies they don’t have the cash on hand to directly fund their Bitcoin purchases, and will only be able to pay off their debt, fees, and interest if the investment grows. With credit card APRs generally around 15%, that growth would also need to be rapid, rather than long-term…

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