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Blockchain Investments May Be Hurting Student Loan Finances

One in five students could be using some of their student loan money on cryptocurrency investments, according to a U.S. survey.  

While the tuition portion of a student loan is generally paid directly to a university, the balance — supposed to be used for living expenses — goes to students. They can use this how they like. Student loan industry analyst site The Student Loan Report quizzed 1,000 students about how they used that cash. It found that more than one in five of them (21.2 percent) were using their student loan funds to invest in blockchain-based cryptocurrencies.

Investing in the oft-volatile world of cryptocurrencies is especially risky for students playing with borrowed money because they are chasing the promise of quick wins in a rapidly fluctuating market, pointed out Adam Button, chief currency analyst and managing editor of Canadian currency trading analysis firm ForexLive.

“It just ran out of gas,” said Button, referring to a note from Barclays analyst Joseph Abate earlier this month, which argued that cryptocurrencies behave like the flu.

Those susceptible to the hype may become “infected” and buy, the note added. They then become candidates for “recovery” by selling off their cryptocurrency assets and becoming “immune.”

As the recovering and immune percentage of the population grows, the number of potential hosts falls, said the Barclays note, eventually reaching an “immunity threshold” as “infections” drop substantially. It added that surveys show the susceptible population for Bitcoin is now relatively small.

Bitcoin’s prices have certainly plummeted, falling from a high of around $20,000 in December to just over $8,000 at the time of this writing. Ethereum fell from highs of around $1,400 to $500. Ripple, too, is down from highs in early January. Many major cryptocurrencies that were trading at the start of this year have either lost value or, at best, not increased.

Likening cryptocurrency to a virus misses an important point though; there is always another variant around the corner. As a thousand initial coin offerings (ICOs) flourish, unsophisticated speculators have an endless stream of investment opportunities.

The young are often the most unsophisticated of all, warns Button.

“Young people are at an intersection of overconfidence and unsophistication,” he said. “As people get older and more jaded, it protects them.”

A poll of 2,000 people in Britain by the London Block Exchange last year seems to bear that out. Five percent of those aged under 35 already have cash invested in cryptocurrency, it said, adding that one in three millennials will invest in cryptocurrency this year. A quarter of them said that they regretted not buying into a cryptocurrency earlier after watching bitcoin’s prices spike late last year.

Conversely, 57 percent of those aged over 55 said that they would not buy cryptocurrencies, according to the research, released at the height of bitcoin’s pricing frenzy in December.

Button argues that cryptocurrencies are among the most dangerous for unsophisticated investors because their volatility leads to emotional investing. Not everyone has the stamina to “HODL.”

“It exposes our psychological weaknesses, our fear and greed,” he said. “It's very difficult to stick to the plan, and the idea might be to buy and hold for a month or a year, but it only takes a moment of weakness to panic and get out.”

As a highly volatile asset, cryptocurrencies should only represent a small part of anyone’s portfolio, said Button, adding that students investing a limited amount of borrowed money are already worth less than zero. This won’t be money that they can afford to lose.

“There could be suicides in those numbers,” he said. “For some young people, losing $3,000 is a devastating loss. It could lead to them leaving school or whatever.”

At the same time, telling students not to gamble is like telling them not to drink or do drugs, he added. In an ideal world, students wouldn’t gamble their meager borrowed living expenses at all. Those determined to do so should be warned of the dangers and encouraged to start small and treat it as a learning experience, he concluded.

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