The cryptoeconomic market suffered another sharp fall on Monday, due in large part to two important factors:
First, the Chinese government's intention to eliminate all the Exchanges of digital currencies in that country, responsible to generate thousands of digital transactions every day; and the second, the announcement of several U.S. banks to ban the purchase of cryptocurrencies with credit cards.
But despite Monday's steep loss in the digital market, the decision of Bank of America, Citigroup and J.P. Morgan to ban digital assets purchases with credit cards, could be beneficial in the long term, because they are protecting their money, and at the same time they are protecting their consumers from getting into deep debt.
There is nothing wrong with investing in cryptocurrencies, as long as you have the money to do so. However, many people were using their credit cards to buy digital currency, hoping to get big returns of investment, but without considering the risk of losing it due to the volatility of this relatively young market.
What are the disadvantages of buying cryptocurrencies with credit cards?
One of them is the impact on the credit score, because the higher your debt ratio is, the riskier you are for the lenders, which translates into a lower score, hence higher interest rates in the long term.
Another one is the fees. Every time there is a purchase with a credit card, there is a fee to be paid either by you or the merchant. And even worse, some banks are considering the purchases of cryptocurrencies as cash advances. This means higher fees, and interest starts accruing immediately, compared to a regular purchase, which falls under your credit card’s grace period and purchase APR.
There is also the foreign transaction fees. If you use a credit card issued by your country of residence to buy cryptocurrencies on an Exchange that’s not based in that country or in a currency other than your country's, you may be charged a foreign transaction fee by your credit card issuer. When a card charges for foreign transaction fees, it’s usually 3 percent of the cost of the transaction.
And finally the worst problem of all: getting into debt. If you buy a digital currency with a credit card and the market falls, you owe the amount of the original purchase price, no matter what the price of the cryptocurrency does. The altcoin can eventually bounce back and even exceed its value, but you would have already paid interest on the original price, and it is likely that your future profit will not cover the principal plus interest.
According to a survey released recently by the Wall Street Journal, 18 percent of Bitcoin buyers used a credit card. Out of that group, 22 percent of those people didn’t pay off the charges, instead saying that they planned to use the money they made from their Bitcoin to cover the cost.
When a market is booming, it might be tempting to spend more than you can afford and assume that you’ll make the money back (and then some) as the price of the cryptocurrency continues to rise. But if the value of your cryptocurrency doesn’t go up (or worse, if it drops), you could end up owing a bunch of money you don’t have, as it probably happened to many people in the last month.
By Alejandro Cortés
Source: Wall Street Journal