Should I take out a personal loan to buy Bitcoin?
Munich — November 2023 — This article looks at the potential profitability of using consumer credit to buy Bitcoin. The implications of Bitcoin financing through personal loans are discussed and analyzed based on historical data and current credit conditions. Ethical aspects are also being examined.
Are you insane?
Some time ago, I had a heated conversation about my favorite topic with a good friend and Bitcoin critic. We were discussing whether Bitcoin would catch on in the future and persuade more and more people to buy and hold Bitcoin. For me, this is obvious, while my conversation partner is still skeptical.
The outcome of this conversation, which I would remember for a long time to come, annoyed me greatly. My friend concluded our discussion with the words:
“If you’re really so sure of yourself, why don’t you take out a loan and buy more bitcoin? That should be a low-risk and clear decision for you.”
His statement didn’t annoy me because I thought it was rude or ill-considered. No, the opposite was true! It annoyed me because I couldn’t counter it with anything meaningful.
I could certainly have reacted emotionally to the fact that I didn’t WANT to take out a loan. That would have been legitimate, but in my opinion there was still no good factual justification.
Even though his question was probably more rhetorical than serious, it stayed with me in the days and weeks that followed. Could it actually be rational to buy Bitcoin on credit?
In discussions with other friends and acquaintances on the subject of credit, I was unable to gain any helpful new insights for a long time. Most people responded almost more emotionally than I did when I asked them what they would think about applying for a loan to buy Bitcoin.
It almost didn’t matter whether I was talking to Bitcoin skeptics or Bitcoin enthusiasts. Both camps reacted with similar criticism and vehemently advised me against loans.
But what is a possible objective approach? Under what conditions does it make sense to take out a loan to buy Bitcoin, and for whom is borrowing for this purpose particularly suitable?
This article presents a brief analysis based on historical data.
What are consumer loans?
In this context, I am talking about so-called consumer loans, i.e. loans that do not require any collateral in order to obtain them.
You could also consider alternative types of credit for buying Bitcoin, such as secured or mortgage loans. The latter is suggested by real estate expert and philosopher Leon Wankum.
In this article, however, I will limit myself to consumer loans and compare a Bitcoin purchase on credit with a Bitcoin purchase using a classic savings plan, also known as “DCA” (dollar-cost averaging).
But what exactly is a consumer loan? A consumer loan, also known as a consumer credit or personal loan, is used to finance goods or services for consumers. The loan amount is up to €100,000 and can have a flexible term of up to 10 years.
Consumer loans are typically used for spending on weddings, furniture, kitchen appliances, cars or major vacations.
There are several advantages that make consumer loans attractive, which are mentioned here: The intended use of a personal loan is free, and there is usually no need to specify a purpose when applying.
In addition, a personal loan is granted without additional collateral, i.e. no deposit of an asset — such as a property — is required.
A consumer loan is repaid in equal monthly rates, which are fixed at the beginning of the credit period. This makes repayment completely transparent and easy to plan.
Consumer loans can also be repaid early. The regulations for the early repayment of consumer loans can vary depending on the country and legal system.
In Germany, the regulation is very favorable for consumers, as the costs for a special repayment amount to only 1% of the remaining debt.
What has advantages usually also comes with disadvantages. What are the disadvantages of consumer loans?
Personal loans are expensive due to relatively high interest costs. Depending on the loan provider, the interest costs can be credit rating-dependent, i.e. the lower the credit rating, the higher the interest.
Consumer loans require proof of regular income, which generally gives employees an advantage over the self-employed. For freelancers and entrepreneurs, access to consumer credit is more difficult.
To illustrate the above, a current example of a consumer loan from Deutschen Kreditbank (DKB) is helpful.
DKB offers a simple loan calculator on its website, which uses two parameters — net loan amount and monthly term — to calculate the monthly rate to be paid and the total costs of the desired loan.
For example, if you choose a net loan amount of €10,000 and a term of 48 months (4 years), the total costs will be €1,562.79 with an effective annual interest rate of 7.29%. The monthly rate then amounts to € 239.71.
There are many alternative providers of consumer loans on the market, some of which offer significantly better interest conditions. In the rest of this article, however, we will deliberately continue with this costly example.
But before looking at a concrete comparison between consumer credit and a savings plan, we will first discuss the question of when it would have made particular sense to take out a loan to buy Bitcoin in the past.
When is a good time to buy Bitcoin with a loan?
We know that the price of Bitcoin in US dollars tends to tends to increase tenfold every four years. A key driver of this price development is the so-called halving, which takes place approximately every four years according to the Bitcoin protocol and halves the amount of Bitcoin that can be mined per block.
A loan for Bitcoin would have been particularly worthwhile in the so-called local price minima, i.e. whenever the Bitcoin price fell very sharply. This was the case in 2014, 2018 and 2022.
The calendar year 2022 is now history, the Bitcoin price has more than doubled compared to January 2023, and the next halving is expected in May 2024 at the latest. Would it still be worth applying for a consumer loan for Bitcoin today, i.e. in November 2023?
Is it worth buying Bitcoin on credit today?
In order to provide a possible answer to this question, we will look at an illustrative example of the last Bitcoin cycle below. We use historical data and the credit conditions from the DKB calculation mentioned above as a basis.
Specifically, we ask ourselves the question: Would it have been more profitable to opt for a consumer loan before the last halving in May 2020, or would it have been better to save conventionally and in monthly rates in the sense of a DCA?
To answer this question, we compare the amount of Bitcoin that would have been obtained using the consumer loan method with the amount of Bitcoin that would have been accumulated through a traditional savings plan.
In November 2019, six months before the last Bitcoin halving, taking out a loan of €10,000 would have given us the opportunity to acquire around 1.2 Bitcoin. The Bitcoin price at that time was around €8,300.
Taking the DKB example into account, we assume that the monthly rates amounted to around €240. Although loans were significantly cheaper in 2019, we assume today’s worse credit conditions for the transfer of the results to the present.
What would have happened if you had saved €240 per month using the DCA method, starting in November 2019 and over a period of 48 months? In this scenario, only around 0.7 Bitcoin would have been accumulated. The amount would therefore have been significantly lower compared to using the consumer loan.
The monthly payments would have been identical in both cases at €240, but taking out the loan in this particular example would have increased the total amount of Bitcoin by a whopping 74% compared to the savings plan approach.
This is not financial advice!
At this point, the obligatory disclaimer must be made that this article does not constitute financial advice. Past profits are not reliable indicators for predicting future profits.
To be honest, the above numerical example is only helpful if we assume that Bitcoin’s price increase in the future will be similar to that of the past. Personally, I think the chances of this are quite high.
In addition to halving, the Bitcoin spot ETF, which is expected to be approved by the Securities and Exchange Commission (SEC) in the USA shortly, might be another relevant factor influencing the Bitcoin price. If, contrary to expectations, this ETF fails to materialize, this would probably have a negative impact on the price in the short term.
I explicitly do not want to advertise consumer loans, but instead create incentives for other individuals to take a sober look at the topic of “Bitcoin on credit” and compare a few figures. It is important to me to promote objective, conscious decisions — for or against personal loans.
Who are consumer loans suitable for?
Consumer loans are certainly not suitable for everyone and do not make sense at every stage of life. So what might the profile of a suitable persona look like for whom a consumer loan to buy Bitcoin is worthwhile? What does the ideal “Bitcoin credit strategist” look like?
In my view, such a persona tends to be risk-taking, knows Bitcoin very well and always keeps calm in the face of strong price fluctuations.
Ideally, (s)he is an employee with a regular income and can easily service the monthly rates with this income.
In addition, (s)he currently has a secure job and good job prospects in case of a job loss. In addition, his or her expenses are fairly constant and predictable. It is therefore more likely that (s)he doesn’t have children.
In my view, if most of the above criteria apply to a person, it can be particularly useful to think about buying Bitcoin on credit and weigh up the pros and cons.
Are consumer loans unethical?
First of all, I would like to emphasize that it is legal to buy Bitcoin on credit in Germany and probably in most countries in the Western world today.
However, some people in the Bitcoin scene strongly condemn loans for Bitcoin. From an ideological point of view, I can understand this very well; after all, Bitcoin is seen as a means of ending our current debt-based fiat financial system in the long term or at least putting it in its place. Bitcoin should not fuel the debt and consumer madness by taking out additional loans. I understand the point!
But I also see the incentives in terms of game theory that Bitcoin sets with its increasing scarcity. As the example above shows, there is an incentive to exchange fiat currencies for Bitcoin today and not in four years’ time. These incentives affect both individuals and institutions.
Actors such as Michael Saylor and companies such as Microstrategy are following this incentive and are already accumulating huge amounts of Bitcoin. How will other players, companies or even states act in the future now that the SEC has approved the Bitcoin spot ETFs and the next halving has further tightened the Bitcoin supply? Do we as private individuals really want to leave the Bitcoin pie to the institutions?
Ironically, I regularly receive promotional letters from my bank trying to persuade me to take out a personal loan. I could “easily and conveniently fulfill my wishes”. From an institutional point of view, loans are desirable. Debt and consumption are desired and the banks release marketing budgets to remind their own customers of this… Don’t condemn the player, condemn the game?
Is it less reprehensible to finance furniture, cars or an expensive vacation with a loan than a Bitcoin purchase? Why is there widespread consensus that buying real estate on credit is perfectly fine to store or increase purchasing power? Can this consensus be different in relation to Bitcoin, which can also serve as a store of purchasing power due to its scarcity?
I think the question of morality can ultimately only be answered individually. My personal view on this requires an answer to the question of what you want to do with the Bitcoin you have acquired and the potentially gigantic price gains.
Do I plan to consume or do I want to invest for a good cause? Do I want to use potential gains to buy the next Lamborghini or perhaps build a sustainable business instead and free myself from the fiat hamster wheel? With a consumer loan, there is a chance that the latter will work a little faster than with a savings plan…
Contact me
If you have any questions or suggestions about my article, please get in touch. I look forward to exchanging ideas about Bitcoin & Co.
Disclaimer
I am not a financial advisor and my articles are not to be understood as financial advice. My content merely describes my personal thoughts.
