Bank 'bitcoin on margin' bans are a welcome curb on risk
Lloyds Bank and other financial institutions in recent days have banned credit card purchases of bitcoin.
Concerns about bitcoin purchases and consumer credit risk may seem puzzling. Surely using credit to buy bitcoin is no more risky than using credit to buy burgers, holidays and clothes. Unlike a burger, at least bitcoin has a chance of not being worth nothing a year from now.
But credit-funded purchases of bitcoin tell banks something about their borrowers. If you are short of cash, then you may use a credit card to help pay for holiday or an appliance.
If you seek protection from theft and fraud, then you may use a credit card while abroad. But if you are using your credit card to buy bitcoin, then you are telling your bank that you would like to have more risk in your life.
The problem, then, with using your credit card to buy bitcoin is not that the price of bitcoin may fall. Everything else that you purchase with a credit card will fall in value with certainty. The problem is that the price of bitcoin may rise.
Customers who buy bitcoins with their credit cards are betting on bitcoin going up and are passing on some of the risk to their bank.
In this case, Lloyds would prefer these customers look elsewhere for credit. For the same reasons, banks typically restrict the use of credit cards to fund purchases of shares and financial derivatives.