A recent report from The Student Loan Report has found that “21.2 percent of current college students with student loan debt have used financial aid money to fund a cryptocurrency investment.” If this statistic doesn’t scare you, it should. To understand why, it’s important we take a step back and look at the history of using borrowed money to invest.
People borrow money to make investments — it’s partially the reason banks loan money in the first place. However, in this case, investment does not refer to a security that can be bought and sold on financial markets like a stock or bond. I’m using the word “investment” to refer to any expenditure of money that will provide continued utility down the road. Taking out a mortgage to buy a house is an investment. Student loans to pay for college are investments. Every investment carries risk.
Student loans are already a risky investment. Students can go hundreds of thousands of dollars in debt to earn finance degrees, only to fail to find high paying jobs after graduation. A recent study from The Bureau of Labor Statistics found among recent college graduates “nearly 46 percent work in positions that don’t require a four-year degree and fall into the category of ‘unskilled labor.”
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Students who choose to use their excess loan money to invest in cryptocurrencies may think the money to be made in the markets can help offset the risk of post-college underemployment, but, in reality, they are doubling down on a poorly dealt hand. If the cards bust, they can not only hurt their own economic positions, but our entire economy.
Investing in cryptocurrencies is inherently high-risk, high-reward. While I don’t doubt the underlying technology behind coins like Bitcoin and Ethereum could one day reshape banking as we know it, investing in such coins is still extremely risky — for a few reasons.
First, cryptocurrencies have no real value at the moment. All currencies are speculative investments at their core, as they provide no future cash flows like a stock or bond. Those investing in these assets in an attempt to get rich are just hoping that the value will increase. While these currencies may have value in the future, the current day-to-day prices have been all over the place, meaning their usefulness as a traditional currency is still a long way away.
Second, there is still very little regulatory oversight regarding cryptos. The lack of regulation has made crypto trading a breeding ground for price manipulation from shady actors such as “Spoofy,” a single entity which effectively dominates the price of bitcoin. These unethical strategies can harm investors who jump into financial markets without prior experience or knowledge, things many college students lack.
As a reader, you may be wondering how it’s possible for students to use loan money to invest in markets. The answer is that student loan borrowers can use excess money from their loans to finance their “living expenses” while in college. The money they use on these living expenses is not heavily regulated, therefore it can end up being used to finance risky investments like BitCoin.
I want to reiterate this article is not meant as an indictment on cryptocurrencies. The technology is extremely interesting, and has widely applicable uses in our society. Unfortunately, the technology is also extremely complex and years away from implementation within our financial system. Speculative buying in the hopes of a quick buck only hurts the public perception and respectability of these coins.
I’m begging student borrowers to not invest in cryptocurrency with their loan money. It is an extremely risky investment. I know low interest rates make borrowing seem like a prudent move, but in reality going into debt is rarely smart. Going deeper into debt to invest in risky securities is even less smart.
Eric Hilkert ([email protected]) is a junior majoring in finance.