On Monday, Lloyds Banking Group announced it has banned its credit cards from being used to buy Bitcoin.
The decision includes Lloyds Bank, Bank of Scotland, Halifax and MBNA credit cards. It follows a similar move by US banks.
It’s a hard decision to argue with. Regardless of the inherent volatility in the value of the cryptocurrency, buying any commodity on credit is a bad idea.
It was also one of the essential ingredients of the 1929 Wall Street Crash. Back then, people who wanted to get rich quick borrowed money from the banks to buy various stocks and shares. And we know how that ended.
Get rich quick schemes
Some would argue that it’s regressive, perhaps even infantilising, to stop people from trying to get rich quick by borrowing money on their credit card to buy into Bitcoin.
But at the same time nobody can deny that the cryptocurrency is highly volatile: in the past seven weeks alone its value has fallen from just above $19,000 to below $8,500.
And yes, stock markets can be volatile as well, but they are at least regulated and backed by some something that has an intrinsic value.
Bitcoin, by contrast, is backed by no central bank, no government and nothing with any tangible value – at least not yet anyway.
Debt fuelled boom
The losses that some Bitcoin investors will have suffered in recent weeks would have been further accentuated if they had borrowed money to invest in the first place.
Obviously, there’s an element of self-interest in all this. Lloyds Banking Group does not want to lend money to people who then use that money to buy Bitcoin only for Bitcoin to plummet in value leaving it with a large number of debtors that are unable to repay it.
We’ll probably never know but it may have already discovered some customers in precisely this position.
But at the same time let’s not be too cynical about this — there’s a moral element here, too. Lloyds and the other US banks have taken a sensible approach by banning the use of their credit cards for Bitcoin purchases.
What they are simply saying is that if people want to risk their money on Bitcoin’s that’s fine, but they won’t pour fuel on the fire by extending credit to those people. And in doing so they have acted before regulators have felt the need to.
For some it may make a mockery of Caveat Emptor - ‘buyer beware’ - which places the responsibility of buying goods/services on the buyer rather than the seller.
But Lloyds and the other banks may well turn out to be on the right side of history with this decision.
To find out how INFINOX Capital can help you reach your financial goals, visit www.infinox.com.