In Focus: Megatrends  

Investors in for 'double whammy' as debt-funded crypto assets crash

Investors in for 'double whammy' as debt-funded crypto assets crash

Interactive Investor has warned investors who bought crypto assets with debt could suffer a toxic combination of investment losses and more debt as the value of crypto plunged in the past month.

Myron Jobson, senior personal finance analyst at the D2C platform business, said the recent sell-off of crypto assets was tough for those who invested in the asset class for the first time, particularly those who took out loans or used credit cards to fund their investments.

Its poll of 1,000 UK adults aged 18-29 in June last year found 45 per cent had made crypto their first investment of choice. Half of the 20 per cent who invested in the cryptocurrency Bitcoin had turned to debt to fund it.

The value of Bitcoin is down 21 per cent over the past month, though it has recovered slightly in the past five days. It is currently worth close to £24,500, having crashed from £32,000 a month ago and a high of £50,000 last November.

Etherium, second only to Bitcoin in terms of market cap, has plunged from more than $3,100 (£2,480) in April to about $2,000 now. It too has recovered from a low of below $1,800 over the past week.

Jobson said: “The crypto sell off has been driven by a culmination of long and short term factors including worries about regulation, security breaches as well as pressures buffeting traditional markets such as geopolitical uncertainty and US interest rate hikes.

“Whatever the reason, the crash is a tough pill to swallow for those who made their very first investment in cryptos.

"Our research found that 45 per cent of young adults aged between 18 and 29 have made crypto their first investment of choice, with an alarming number funding this through a cocktail of credit cards, student loans, and other loans.

"The worry is many have been hit with a double whammy of investment loss and a deeper plunge into debt. The debt issue is made worse with rising interest rates."

The UK base rate has risen to 1 per cent in consecutive decisions over recent months as the Bank of England tries to tame inflation, which has surged ahead of its 2 per cent target each month since May last year. It hit 7 per cent in March, a 30-year high.

No inflation hedge

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said "fears about rampant inflation and the abrupt ending of the era of cheap money have sent cryptocurrencies careering down a cliff edge, as investors scuttle away from risky assets."

She said the losses amid rising prices showed that Bitcoin was no inflation hedge and inherently risky in nature.

"We’ve had warnings time and time again from the financial watchdog, the FCA that investors risk losing all their money if they invest in the crypto wild west and the red flags it’s been waving have been shown to be prescient given the downwards rollercoaster ride crypto is currently on."