Buying bitcoin and other digital currencies is risky enough. After all, double-digit percentage moves in a single day are quite common, and during particularly volatile periods, major swings are possible. For example, after a few bad news items, many cryptocurrencies have been roughly cut in half over the past week alone.
However, if a speculator risks money that he or she can afford to lose, it's not such a big deal. On the other hand, buying bitcoin with debt is a recipe for financial disaster -- especially if high-interest credit cards are used. Fortunately, many banks are starting to protect would-be speculators from themselves.
Wait -- have people really been buying bitcoin with credit cards?
Eighteen percent of bitcoin investors say they used credit cards to fund the purchase, according to a December LendEDU survey.
Alarmingly, 22% of respondents who said they used credit cards could not pay off their balance after buying their bitcoin. A staggering 90% of these bitcoin buyers were relying on selling the digital currency at a higher price to pay off their debt. At the time, bitcoin's rise was parabolic, and many people seem to have assumed it would continue.
Obviously, this is a bad idea. In fact, since the LendEDU survey was conducted, bitcoin's price has fallen by more than half. So it's fair to assume that many of the respondents who said they couldn't afford to pay off their balance still owe considerably more than their bitcoin is now worth.
As LendEDU research analyst Mike Brown wrote in the survey findings, buying bitcoin on credit "is not a wise decision no matter which way it is spun."
Some of the biggest banks just said "no" to bitcoin credit card purchases
To be clear, you can technically still use credit cards to buy bitcoin and other digital currencies. It's still an available payment option on major exchanges.
However, that is only one part of a potential credit card purchase. A credit card's issuing bank needs to approve all purchases. And the list of banks that won't allow purchases on cryptocurrency exchanges is growing rapidly.
On Friday, Feb. 2, JPMorgan Chase, Bank of America, and Citigroup, three of the largest U.S. credit card issuers, announced that they would stop processing digital currency purchases. Lloyds Banking Group announced on Monday that all 8 million of its credit cards would no longer be usable on exchanges.
What could this mean for the cryptocurrency market?
First and foremost, this is certainly a financially responsible move on the part of the credit card companies. Bitcoin and other cryptocurrencies are highly volatile investments whose prices can rise and fall rapidly. If you can't buy less volatile investment assets, like stocks, on a credit card, why should you be able to buy bitcoin?
Having said that, this could have a big impact on cryptocurrency market, which could put negative pressure on prices. Keep in mind that the other 78% of credit card buyers can afford to pay the bill, or buy in cash -- but using a credit card is often the easiest way to instantly buy digital currencies on major exchanges.
On Coinbase, for example, it takes roughly a week to buy digital currencies through bank draft. With a credit card, the transaction is instantaneous.
The first of the banks to ban cryptocurrency purchases announced their decision on Friday. Since then, most digital currencies are down by double-digit percentages without any other significant negative news. So it's reasonable to say that while it could keep many would-be cryptocurrency speculators out of trouble, the move by some of the world's largest credit card issuers to shut down cryptocurrency transactions is a negative catalyst for the volatile market.
Matthew Frankel owns shares of Bank of America and has no position in any cryptocurrencies mentioned. The Motley Fool recommends Lloyds Banking Group and does not own or recommend any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.