Bubbles are meant to burst.
Take, for example, the dot-com bubble of the late 1990s or the housing bubble at the outset of the 21st century. Both bubbles inflated, as bubbles naturally do. But then those bubbles popped loudly and forcefully – to the financial detriment of millions of tech workers and millions of homeowners.
Today, we have a new bubble in our midst: the bitcoin bubble. Disturbingly, it’s a bubble that, in part, is being floated by credit cards.
First, let me explain what bitcoin is. Or, rather, let me allow CoinDesk.com to explain:
Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros. … No single institution controls the bitcoin network. This puts some people at ease because it means that a large bank can’t control their money.
As of mid-December 2017, a single coin was worth more than $16,000; by comparison, one share of Amazon stock was going for close to $1,200. One prominent bitcoin investor has hyped the potential of bitcoin, predicting it could be worth $100,000 in the next three to four years and $1 million in 20 years.
Why does it seem that everybody on the planet is buzzing over bitcoin? Here, I turn to The New York Times to enlighten you about why bitcoin is so much more popular than relatively stable investments:
Casinos! People love to gamble, and the spectacular rise of bitcoin – especially in the age of social media, which tends to hasten trends and encourage bandwagon behavior – has encouraged a set of thrill-seeking speculators to bet big on the currency, hoping to make a quick buck and get out before a crash.
Bitcoin and credit cards
So, what’s the relationship between bitcoin and credit cards? It turns out that some people seeking to capitalize on the make-a-quick-buck bitcoin craze are borrowing money – via credit cards, mortgages and home equity lines of credit – to buy this virtual money, according to CNBC.
Bitcoin “is not something a guy who’s making $100,000 a year, who’s got a mortgage and two kids in college, ought to be invested in,” Joseph Borg, president of the North American Securities Administrators Association, told CNBC.
And it’s not something you should be buying with your credit cards, especially now.
Yet plenty of would-be bitcoin investors apparently are itching to rack up credit card debt to rake in the bitcoin bucks. In late November 2017, CNBC reported that the Google search term “buy bitcoin with credit card” was near its historic high.
This tells me that some card-wielding bitcoin investors could be on the edge of a debt disaster.
As noted by Borg, bitcoin currently is in a “mania” stage. But at some point, the frenzy – and the astronomic values – will level off. Put another way, the bitcoin bubble is going to burst. We just don’t know when or how.
Given that risk, it makes no sense to put a bitcoin purchase on a credit card. Let me repeat that: It makes no sense to put a bitcoin purchase on a credit card.
And if you don’t believe me, pay attention to what Deutsche Bank says. In early December 2017, the bank’s chief international economist warned that bitcoin is one of the 30 biggest investment risks of 2018.
Or consider what Federal Reserve Chair Janet Yellen said Wednesday after the Fed hiked interest rates.
“I would simply say that bitcoin at this time plays a very small role in the payments system,” Yellen said, according to Yahoo Finance. “[Bitcoin] is not a stable store of value, it doesn’t constitute legal tender, and it is a highly speculative asset.”
From bubble to bust: Card debt remains
Once the value of bitcoin plummets – and it will – your investment will have withered, and if you bought the digital currency with a credit card, you’ll be stuck with the debt you accumulated to get in on the action.
With the average interest rate for a credit card hovering around 16 percent, according to CreditCards.com’s Weekly Rate Report, you will have wound up making a costly bet on bitcoin (unless you pay off your entire card balance in one month).
In an attempt to lure bitcoin suckers, one website brags that you can buy bitcoin “safely and quickly” with a credit card. That may be true, but it’s also dangerous and dumb.
If you fall into the bitcoin/credit card trap, you could end up begging for coins instead of collecting bitcoin. That may be an exaggeration, but just ponder this scenario before you pull out a credit card to buy bitcoin.
See related: Charged Up! podcast: Uncovering cryptocurrencies, Blockchain could spur a credit cards rewards revolution