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Start Worrying When Investors Borrow to Buy Bitcoins

The gist here is that you only worry when people and companies start borrowing money to invest in cryptocurrencies. Basically, if you’re putting a small amount on your credit card via one of the exchanges that support it, it is unlikely to create systemic risk; its only when people decide to mortgage their homes and go all in on crypto that there may be issues. This may start happening now that Wall Street is starting to notice this, but its unlikely to happen anytime soon.

Start Worrying When Investors Borrow to Buy Bitcoins – Bloomberg:

“First, let’s think about why such a crash might happen. The long-term case for bitcoin is based on its viability as a currency — basically, if people stop using government-issued fiat currencies to buy cars and TVs and bread, and start using cryptocurrencies, early investors who happen to have stashes of the new money on hand will benefit mightily.

But there are good reasons to think bitcoin won’t replace fiat money. The currency is so volatile that if people’s salaries were paid in bitcoin, they wouldn’t know how much they were getting paid. If they tried to make purchases in bitcoin, their paycheck might be much smaller by the time they went to the grocery store”

Noah Smith goes on to talk about real world uses:

People who want to pay for black-market goods like drugs, or who want to launder money, will continue to use it, as will those who want to evade capital controls like those used by China. Other cryptocurrencies, such as ether, are also part of software platforms that allow people to execute smart contracts.

As to why you only worry when people are borrowing to buy it?

Why does debt make bubbles so much worse? When equity crashes, notional wealth simply vanishes. That makes people feel poorer, which makes them consume less — a phenomenon known as the wealth effect. But when companies or households have borrowed a lot of money from each other, an asset price crash can also cause other bad effects. Lenders who see their loans go bad will themselves be forced to borrow money, which slows the real economy because borrowing is costlier than funding a business internally. Debt also creates systemic risk, because key financial institutions can go bankrupt easily if they have too much leverage.

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