Debts versus Assets, good debt versus bad debt
If you were to ask me this question and I didn’t know you, or thought you might sue me for giving you bad financial advice, I would say no.
But if I was writing an educational article, which was not financial advice, but was meant to teach teach you and entertain. I would say...it depends.
Debt is Bad
Now we are all taught debt is bad and assets are good. But that’s sim-lipstick and a very limited view of a complex topic. It assumes all debt is the same, and all assets are the same, and that’s not true.
Some debt is good
In general, debt incurred to buy assets is considered good debt. But that’s not all you need to know.
Asset classes or types
All good investing education starts with a categorization of assets in terms of liquidity and performance. We all know assets are appreciating invests, as in they grow in value. But it very important to understand its other characteristics because that should help us decide whether to borrow to buy it.
Performing Assets versus non-performing
In simplest terms a performing asset makes money. In crypto terms a buy and hold investment may appreciate, but doesn’t make money, so it’s non-performing. But a crypto that makes you money while you hold it is a performing asset.
So if you were to borrow to buy a crypto it might be wise to buy a performing one because the money it makes could help you pay the loan. This would suggest that buying a non-performing crypto would be riskier because it can’t help you pay the loan.
Liquid versus illiquid or less liquid
A liquid asset can be easily converted into cash to pay off a loan, if your financial status declines and you can’t afford the loan. Alternatively an illiquid asset doesn’t afford you this certainty, and might be a less desirable choice to go into debt to own.
Historical Rate of Appreciation
This is another important factor in determining good versus bad debt, and hints at the relative wisdom of borrowing to buy an asset. The historical rate of appreciation exceeds your loan borrowing rate, on paper it’s a good decision, I.e. sound investment, provided you can pay the loan with disposable income, and the asset is characterized by capitol preservation.
On the other hand, if it’s a highly speculative investment, with potential for great appreciation, but potential for a large downside, it gets more complicated, because you might have to carry the debt longer and you may want to get a longer term loan. This increases your loan costs, but gives you more time to be right.
Complex decisions require good financial advice and considerations of your unique financial situation.
A good financial advisor is worth their weight in gold or Bitcoin. I suggest you consider that many rich people frown on taking on debt even to buy assets, but other rich people became rich borrowing to buy assets. Life is not black and white, so neither are it’s solutions.
In options trading we say : Give yourself time to be right!
So from an educational perspective, and nit financial advice, my answer is this: I think borrowing money to buy assets is incurring debt to purchase something you hope will increase in value above the debt. It’s purely speculation, and speculation by definition is gambling. But investing is also all about buying something you hope will be worth more in the future, so it’s also gambling.
A few of the big questions are is can you afford to A. Lose all your capitol and B. pay the loans payments, C. Will the asset you borrow preserve your capitol or maintain at least the value you borrowed to own it, D. Is it liquid enough that you can get out of it, and E. are you buying enough time to be right.
You should know enough to ask the right questions and interpret the answers. Or know someone who does!
Lastly words...
When a bear market starts, be it oil, gold, stocks or crypto. The people who can hold through the bad times will benefit during the good times. But many times you need enough time to make it or survive the bear market. You need enough time to be right.
