That is probably the most disturbing title post for any financially savvy people out there.
First of all, it’s not just a funny title; it’s something I actually did. Second, please hear me out for a moment.
Credit cards can be either a terrific or terrible product, depending on who is using them. Most people say they’re great if used correctly, and that’s probably true, BUT… we are not perfect economic beings. As Thaler would say, we are not Homo economicus. We are Homo sapiens.
As flawed and deeply influenced beings, we fall prey to the psychological tactics credit card companies use, making it easier for us to spend and spend and spend. Struggling to pay? No problem! Just pay the minimum and we’ll charge you 30%+ interest on the loan. Wow, thanks!
Awful, awful, awful.
So, this post is not about credit card use and debt levels, though that would make for a very interesting discussion—stay tuned.
This post is about using those same instruments, which charge me 40%+ yearly interest for a cash advance on my credit line, to buy investment assets.
Now, this is something I’m not recommending anyone do. Even if you manage to make a profit, the burden of debt can be mentally exhausting. Anyone who has been in debt knows what I mean.
With that clear, let me tell you what I did and why.
A few months ago, I took a cash advance on my credit line in the form of a loan with a 36-month maturity and a whopping 46% yearly interest rate with monthly payments. Yikes.
Why did I do that?
Well, first of all, I was already fully invested, had $0 cash, and was basically negative cash flow at the moment. But the crypto market was in a DEEP bear market.
Bitcoin was down around 76%, and most other altcoins were down 80-90%. At that point, I knew I needed to invest more, so I knew I had some credit available. I did the math.
The bear market was already showing serious drawdowns and had lasted more than a year.
So, for example, if I took a $10,000 loan, I would be paying around $4,600 in interest the first year, and so on. I figured I needed to make at least double that to be safe.
I analyzed some coins that were down 80%+, assessed their potential upside in the next bull run, and found an average of 200-300% upside. That was way more than the 46% I was borrowing, around a 1:4 risk-reward ratio.
The worst scenario I saw was those assets rising 100%, which still isn’t that bad, even if the drawdown dragged on for another 12 months.
The real worst-case scenario would be the assets never recovering, and I end up paying the full 46% on money I didn’t have. Yikes. But I recognized that possibility and decided not to borrow a huge amount, ensuring I could always get a job or supplement my income to help pay the loan.
This meant I wouldn’t take a $100,000 loan but a smaller amount.
So that’s what I did.
I took the high-interest loan under two conditions:
1. The risk-reward was greatly in my favor, around 1:4
2. I took a small amount compared to my investment portfolio and potential worst-case scenario, ensuring I could repay it quickly and easily
Fast forward, the bull market is already strong, and the investments I made have risen around 300% as expected.
Now I’m debating when to sell and repay the debt, which is HARD. I don’t want to sell those nice assets that keep going UP!
But the debt is very annoying, and the interest is absurd. I’ve started to pay down around 30% of it and will probably liquidate everything in the next 3-5 months.
So, yes, this time it worked out. It was risky, but I tried to minimize my risk as much as possible.
Imagine if I could borrow 600 million at 0.10% interest like Michael Saylor to buy Bitcoin.
Well, maybe someday! 🙂
Have a great day!
Zifush