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0 sats \ 4 replies \ @F 7 Oct 2022 \ parent \ on: Loan to buy Bitcoin bitcoin
-What if the price is halved in the next few months?
-What if the person loses their job and cannot pay the loan back?
-What if they are forced to sell their bitcoin at a loss for some unexpected reason?
Bear in mind when reading my answer that I'm thinking on a plan where you get a loan, buy BTC with it and then slowly sell BTC each month to get in fiat strictly the amount of the loan installment. So, you build a "loan stack" at the start and then slowly "shave your stack" to face the installments.
- What if the price is halved in the next few months?
This could happen and you could still earn money. You will have to shave more BTC that you would have if the price didn't halve. But that doesn't necessarily mean that you will have to sell your entire stack (it depends on the behaviour of the price during your entire loan payback period). In my case, I have a 10 year loan, and I am fully aware that it's almost sure that, at some point in that time, Bitcoin's market price will drop +80%. Maybe even more than once.
- What if the person loses their job and cannot pay the loan back?
This is only a concern if you deplete your loan stack completely. Otherwise, you just keep on shaving, regardless of your job situation. If you deplete it, you will struggle. How much, depends on your loan and situation.
- What if they are forced to sell their bitcoin at a loss for some unexpected reason?
The loan stack should be separated from your personal life. If you use the loan stack to face personal expenses, things get tangled up. In the end, it would be the same as if you faced some unexpected problem and got a loan to face it, but you are not hedged against Bitcoin's volatility. You might come up extremely lucky or extremely unlucky.
Some final comments:
- Your concerns are super valid, and I think anyone thinking about doing this should dive into them. I certainly did.
- It is also important to ask the same questions but negated. What if it doubles? What if they don't? What if they aren't?
- The magnitudes of figures relative to your personal financial situation are also important to answer these questions. Things are different for a 30yo earning six-figures that borrows $20K at 2.5% APR on an 8 year period vs a 60yo soon to be retired with a $40K pension that borrows $30K at 6% APR on a 4 year period.
What's your take? Do you think we are missing anything important in our judgement?
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Hmmm... Was not thinking you would be selling bitcoin every single month to pay off the loan. Depending on your country, what about taxes? Every single sale of bitcoin may be subject to capital gains tax, so that could be cutting into your profit margin.
If you continue selling bitcoin to pay off the loan, won't you end up with less and less bitcoin in the end..? I know you will still have more than before you took on the loan, but the same can be said for just buying bitcoin with dollars you already own.
I'm just playing devil's advocate. Historically, taking out a loan to buy bitcoin has been a great idea. But who knows what will happen in the next few years.
There is risk involved, more risk than just buying with dollars already owned. Whether it is worth the risk is up to the individual, but generally I'd advise against it as most people will not think it through as well as you seem to be doing.
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Depending on your country, what about taxes?
If you report under a negative tax regime, that will definitely take a dent off your profit.
If you continue selling bitcoin to pay off the loan, won't you end up with less and less bitcoin in the end..? I know you will still have more than before you took on the loan, but the same can be said for just buying bitcoin with dollars you already own.
You are 100% guaranteed to see your loan stack get reduced from its initial size, yes. But any amount you have left after paying the loan is benefit.
There is risk involved, more risk than just buying with dollars already owned. Whether it is worth the risk is up to the individual, but generally I'd advise against it as most people will not think it through as well as you seem to be doing.
Agreed, anyone should give plenty of thinking to something like this, but people often don't. To that matter, people even do it with mortgages, as history has proven time and again. It always blows my mind when someone close to me gets into a mortagage without having ran a single spreadsheet to analyze things. So yes, I concur that this idea is not fit for most.
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Another thing depending on country you could have fiat in an offset account that reduces interest while it sits waiting to be turned to btc
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