On January 3rd, 2018 the world saw an exciting development in the cryptocurrency world. Three of the top financial institutions banned the use of credit cards to buy cryptocurrency. The ban came in response to :”The drop in Bitcoin price due to FUD in the media this week and the volatility and high risk of cryptocurrency” - according to Cointelegraph. So,what is the issue with buying cryptocurrency with a credit card? Let’s grab some pros and cons of buying cryptocurrencies with credit card and why the top three financial institutions will not do this any more.

Leverage in Trading

Leverage is a trading tool that allows you to bet more money than you put down in the trade. In a way what you put down in the trade is like a deposit. The upside is that you can take advantage of deal immediately with a smaller sum. The downside is that if you lose using leverage, you owe more than the amount you put down on the trade. For example, if you put down $1000 and you use leverage to make your bet $2000 then if you win, you win as though you had bet $2000. However,losing you lose $2000. So you have to have to pay the other $1000 and additional costs for losing. Therefore, you have to have the money to cover all these expenses.

The same bet without leverage would mean that you would get your original $1000 plus the winnings if you win. If you lose you only lose $1000. Beginners are always recommended to trade with no leverage because of the downside of losing with purchase. Once you can trade successfully, most traders recommend to continue buying and selling until you understand the idea and have enough capital to cover your inevitable expenses.

Buying Cryptocurrency on Credit and with a Credit Card

Cryptocurrencies are volatile and high risk that buying on credit is not advised. One of the reasons is because the price changes so quickly that by the time the credit card payment has gone through the price of Bitcoin could have swung against your trade. This would mean that you would lose on your trade, have fees to pay, and have to pay the credit card debt you now incurred. Also buying cryptocurrency with a credit card is likely to be charged as cash advances. This is a new policy that many credit cards are using since January 2018. In other words, you would have additional fees to pay because of the transaction being charged at the higher cash advances fee structure.

Now that we have a better picture of leverage, you can appreciate the next step. Buying with a credit card could be seen as similar to trading with leverage. You can purchase cryptocurrency on credit and use the credit essentially as leverage. The problem is that because of transaction time, the market might have changed in a meanwhile causing you to make a loss. On top of that, there are the fees. Now, t there is the problem of buying on credit as well. So you now have to pay the initial investment; all charges incurred, including cash advance fees; and maybe forex fees.

The Bottom Line

If some of the top financial institutions are not allowing buying on credit card, or credit for that matter, neither should you. Manage your risk, stick to your trading or investment rules, and never contribute more than you can afford regardless of whether you use cash, credit, or any other means of payment.