I first bought Bitcoin (BTC 0.86%) in 2015 when it was $400 per coin. I was 22 years old and fresh out of university. I had paid for my own schooling, so I graduated with about $60,000 worth of debt. I wasn't much of an investor, and I was lacking in financial literacy. I dabbled in a couple of other types of investments but resonated most deeply with Bitcoin. I never imagined that the investment in Bitcoin would work out as well as it did. But if I had to do it again, I wouldn't have sold my Bitcoin to pay off my debt.
Paying off debt with Bitcoin. Image Source: Getty Images
Inflation makes debt worth less over time
Paying off my debt as quickly as I did was not the best decision. I should have made my minimum payments on my student loans and invested the rest. Instead, I paid twice and sometimes three times my monthly minimum payment. I thought being debt free meant that I had financial freedom. But I learned later that I was never going to get rich if I didn't learn how to use debt as a tool. I was thinking of debt solely as a bad thing -- not as a means for multiplying my gains.
I didn't take into account the fact that inflation will make my debt worth less over time. Even though the amount of debt I have may increase, the value of my debt actually decreases over time, as it is denominated in an inflationary fiat currency -- in my case, Canadian dollars. It is far more useful to invest my money in the stock market and make my minimum payments every month than try to pay down my debt. In Canada, my student loans were given to me by the provincial and federal governments. Both interest rates were below 5% and in the case of my provincial loan, it was 0% for several years. This means that although I was required to make minimum payments every month, the debt wasn't actually costing me anything to have.
After the 2017 bull run, Bitcoin peaked at $20,000 per coin. I didn't sell at the top but quite close to it. I sold enough to completely pay off my debt. The reason why paying down my debt might not have been a good idea is because I was only paying between 0% and 5% per year to have it. Since Bitcoin was growing faster than the interest on my debt could accumulate, it makes sense to hold onto the Bitcoin, and slowly pay down my debt.
The Bitcoin would have been worth far more now than the price at which I sold it in 2018. I suppose there was no way of knowing that Bitcoin would go back up again. I was still a naive investor at that stage of my life and wasn't certain that Bitcoin was going to pan out at all. Still, the principle of keeping debt as long as possible and servicing it with cash flow is the strategy I would have employed.
CRYPTO: BTC
Key Data Points
Using debt effectively
I thought debt was something I needed to get rid of. It wasn't until 2 years after I paid off my debt that I began to understand that debt is just another financial tool. The trick is to get the debt to work for you. If the return on the debt is greater than the interest rate you're paying to have the debt, then the debt is being used effectively. Needless to say, selling Bitcoin to pay off my debt all at once in 2018 was not an effective use of my loans. I could have recognized that my money was better invested in Bitcoin. Abstaining from paying my loans would have meant that I would have a lot more Bitcoin, and thus money, than I do now.
