It is Getting Harder to Buy Cryptos With Credit Cards and That’s A Good Thing

One of the more concerning crypto trends in 2018 is the increasing number of traders who use credit to finance their cryptocurrency purchases. Lured in by the prospect of eye-popping returns, many cryptocurrency investors have resorted to these tactics, with some even going to greater lengths to participate in the momentum.  Stories of individuals selling their homes or even mortgaging residences to finance purchases of cryptocurrency are all too common to count.

Credit cards are generally viewed as a poor vehicle for financing investment decisions for a variety of reasons that range from eroding returns to raising the risk. This hasn’t deterred thousands of users from purchasing bitcoin and other cryptocurrencies at an alarming rate, however, leading to a stern response from banks and financial institutions.

Throughout the first half of the year, one of the dominating headlines across the crypto sector has been the decisions of several payment processors and major banks to ban their users from purchasing cryptos with their services. The moves have been received as controversial to say the least, with some claiming ulterior motives and others arguing that consumer safety is a driving factor. Regardless of where the truth lies, the decision is likely a net positive for traders.

Credit cards are useful for financing purchases and payments, but investments operate significantly differently, and can create unnecessary risks. The problems are also exacerbated when purchasing cryptos, due in large part to their notorious volatility and the changing regulatory stance. Moreover, considering the sector’s track record for investors, the increased barriers to purchase may be beneficial for cryptocurrency over the long run.

Bans From All Sides

The current trend of restricting credit card payments began early in 2018, with Visa and Mastercard reportedly banning purchases of cryptocurrency using their services. Although both companies clarified the extent of their prohibition (which amounted to reclassifying them as cash advances and appending higher fees), several large banks in the US followed suit soon thereafter. In February, Bank of America, JPMorgan, Capital One, Citigroup and Discover all banned their credit card holders from purchasing cryptos. In June, Wells Fargo finally caught up and joined the prohibition.

While the financial impact of their decisions is up for debate, the underlying theme repeated by the banks and payment processors was the same: customer safety. According to them, the sector is rife with openings for consumer abuse. Moreover, they prefer to be proactive instead of spending countless spends in reactive measures when customers cannot repay their debt or must resort to challenging charges from fraudulent exchanges. While some argue that the real reasons include a fear of the looming crypto revolution and other financial concerns, the result is the same—retail investors now have a significantly harder time purchasing cryptocurrencies with their credit cards.

Is it Good or Bad for Traders?

The ban is paradoxically both good and bad for investors. On the negative side, retailer traders must explore less efficient avenues for purchasing coins. Moreover, the restrictions seem arbitrary to many users, who point out that other risky activities like gambling face no bans. In their minds, the undue attention cryptos receive is unwarranted. 

On the other hand, cryptocurrencies’ highly unstable nature means that investments financed with credit could go awry in seconds and do drastically more damage to consumers and inexperienced investors. A poll by LendEDU in late 2017 found that 18% of bitcoin buyers did so with a credit card, and one fifth of those buyers had yet to repay the balance. At the heart of the problem is the fact that a dip in bitcoin’s price (which can be quite severe) not only causes financial losses, but precludes customers from repaying the sometimes large investments they finance with credit.

Moreover, recent changes to how Visa and Mastercard classify and charge purchases of cryptocurrencies erode the profit potential of even successful investments. Both processors now charge crypto transactions as cash advances rather than purchases, which allows them to append significantly higher interest rates. Furthermore, cash back credit card holders thinking they will earn points from their purchases will by dismayed to find that this reclassification precludes from receiving rewards for spending on cryptocurrency.

Another considerable concern for financial services providers is the lack of regulation and consumer protections inherent in the crypto sphere. The sector has been resistant to regulation, and governments continue to scratch their heads trying to tackle the issue. As a result, exchanges have no obligation to provide any real consumer protections or meet security standards, which exposes them and consumers to significant dangers. For payment processors and banks, the costs associated with dealing with these problems was enough to warrant a harsh response.

Where Will the Standoff Lead?

For now, banks are likely to remain firmly entrenched in their position, given that granting any credibility to cryptocurrency may expose themselves to greater liabilities. Although Visa and Mastercard clarified their “bans” and Mastercard recently was awarded a patent for speeding up cryptocurrency payments, other financial institutions will continue to monitor the situation before lifting their blanket restrictions. For consumers, this means a slightly more elongated path towards purchasing and trading cryptocurrencies. Nonetheless, it also signifies a more appropriate approach to accomplishing the stated goal without resorting to the dangerous practice of financing investments with credit cards.

 

Comments

Golden Phoenix Sun, 07/22/2018 - 10:18 Permalink

General Rule: If you're going to borrow to finance an investment that you can't live in keep it in a margin account and limit to what you can afford if it's a total loss. Either that or structure it so the resulting bankruptcy will be business not personal. Best of all, both!

passerby Sun, 07/22/2018 - 10:32 Permalink

If the main concern is the nature of crypto's volatility, there should be no problem for credit card issuing banks and exchanges to be ok with prepaid credit cards for crypto... but they aren't. The larger issue can only be financial surveillance.

tangent passerby Sun, 07/22/2018 - 13:53 Permalink

The credit cards main concern should actually be cryptocurrency putting them out of business. Certainly they are obsolete already and its only a matter of time before Visa and Mastercard are going to be an extra fee at the register for so you have a purchasers insurance that you can't get with BTC and the rest.

In reply to by passerby

PumpherDumper Sun, 07/22/2018 - 12:41 Permalink

Total bullshit.  I bought all, 100% ALL of my crypto with credit card.  Made a 50x increase.  Paid off everything, home, 2nd home, bought 3 new cars, an RV, a boat, paid of kid's graduate student loans, bought land.  Supplies for years.  And the banks?  The banks get zero, nothing, nada.  Believe me, that is the ONLY thing this is about.  Fuck banks.  I am my own bank now.

SunRise Sun, 07/22/2018 - 13:26 Permalink

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Silver Savior Sun, 07/22/2018 - 13:48 Permalink

No it's not a good thing because they are telling you what you can buy and the banks are horrified of cryptos dipping into the banks pig profits.

What's next? They will say you can't buy silver or gold on them. Yeah yeah I get it. They are talking risk here but in reality every card holder should default all at once and put these institutions in their place. 

The history books.

exartizo Sun, 07/22/2018 - 16:24 Permalink

OK.

Here's the truth:

Cryptocurrencies will replace the current banking system eventually, INCLUDING credit cards.

So. The Credit Card companies are literally Scared To Death that their entire business model is outdated technologically and RIPE for the cryptocurrency model to usurp it.

Anything the credit card companies can do to prevent the destruction of their Cash Cow credit cards they will do as long as they can.

But the end of credit cards is inevitable. Simply, credit card companies are just trying to slow down the demise of their monopolistic businesses.

CRYPTOCURRENCIES ARE THE FUTURE OF BANKING.