The deceptive allure of investing with debt or credit

If you believe that the market you have invested in will rise, why settle for the money you have? You can borrow from your friends or relatives, take out loans from banks, and earn more with larger amounts of money, quickly pay off the debts you have taken. So, do all these processes really work like this?

One of the things I have emphasized frequently since my first article is that you really need to question whether you are an investor or not. In my opinion, especially in crypto markets, many people think they are investing, but in fact they are gambling, acting according to others' words, and tend to blame others after they lose. In today's article, I will discuss why people invest with debt and credit, why this is absurd, and what should be paid attention to.

The risk threshold for those entering into debt is rising even further

First of all, each of us has different personalities. While some draw a very cautious profile, some prefer to be a more balanced investor, and some prefer to increase their risk threshold with the mentality of 'all or nothing.' If we say that most of the people investing in the cryptocurrency markets are from the third group, we wouldn't be wrong (Assuming that at least 90% of the people are left inside or exit with losses in each cycle). One of the common behaviors in these individuals is trying to 'invest' by borrowing money or taking out loans. They believe that the market will rise, provide tremendous gains, and the more budget they allocate, the more money they can make, relying on the people around them, cryptocurrency influencers, or their own knowledge they have built up in a very short time. Therefore, a person who believes that the market will rise thinks that they can repay the loan or debt in a short time, that it is not gambling, and that they made a conscious decision. Another problem created by this situation is that individuals become more strongly attached to their decisions and raise their risk thresholds even further. A person who thinks the market will rise and invests more money by taking more risks will be more inclined to fall into cognitive biases as they will not want to believe that what they are doing is illogical.

The damages caused by irresponsibly taken debts

However, no one can ever know which direction the market will go. What we do is just to create certain investment strategies based on specific scenarios and make changes to our plans dynamically, trying to protect our risk and portfolio as smoothly as possible. From here, thinking that you can quickly pay off the debt or credit you have taken may not go beyond misconception. You may believe that you can invest with zero cost by selling half of the products you bought in a scenario where you have made 2x gains, and this can sometimes really happen, but you also need to consider scenarios where debt or credit taken recklessly can result in losses along with your balance.

Loss is not just about material wealth

Another problem of investing with debt or credit is that individuals may make emotional and hasty decisions in order to repay money they do not actually have. When the market shows a very small sign of increase, individuals may succumb to FOMO, jump on the bandwagon, make purchases, and wait for the price to reach their target area. At this point, even if individuals make a profit, they do not end their transactions until they reach a level where they can repay the borrowed money and are tossed around by the movements of the market. Here we are talking about a scenario where the individual has made a profit and has not yet lost money. In the scenario where they incur losses, completely different mechanisms come into play. In order to compensate for existing losses, individuals may continue to take on more debt or credit to continue trading, attempt to quickly recover their money through futures trading in a much riskier way, and strive to pay off both the losses and the new debt they have incurred. You or someone you know may have experienced the scenarios I mentioned. We frequently see such examples in the news or on social media. These situations adversely affect both the individual and their immediate circle not only financially but also emotionally, psychologically, or physically, leading to deteriorating relationships and a decrease in quality of life.

Minimize the damage

Investing is the process of directing your existing savings, which you do not need and can risk, to different financial instruments such as gold, foreign exchange, stocks, real estate, crypto, etc., in order to provide a certain return. Each financial instrument has its own risk and return potentials, and the periods it contains also affect the existing risks, such as economic crises, wars, high inflation, low interest rate periods. Every investment you make has two absolute outcomes: either you earn more money or you lose more money. Therefore, it is important to invest amounts that will not affect your daily life or your personal well-being or psychology, whether you need them to sustain your daily life or in case of losing. Of course, every lost amount of money affects individuals negatively, but beyond a certain threshold, it can cause much greater problems for individuals.

Does the amount of debt you have affect your daily life?

I'm not claiming that you should never invest with debt or credit. Of course, you can evaluate relatively less risky investment instruments by taking credit or borrowing in periods where interest rates are low and the market is not very volatile, but the ability to evaluate these periods comes with financial literacy. You can take credit and borrow as long as you educate yourself, observe the market and macroeconomic culture, and invest consciously. Even at this stage, I believe that the amount of debt you borrow should be in amounts that will not affect your daily life, individual well-being, or existing relationships. You should always remind yourself that you can lose as much as you think you can profit and that you can sell the products in hand at a loss to pay off your debt if you cannot create a different source, and you should decide accordingly.

This article does not contain investment advice or recommendation. Every investment and trading transaction involves risk, and readers should conduct their own research when making decisions.