Ethan Nguonly, a 22-year-old software engineer, started investing in the stock market with the help of his parents before he was a teenager. Today, his investment portfolio includes close to $135,000 in retirement and brokerage accounts, plus two houses.
But he didn’t get there without making what he now calls his biggest financial mistake.
Between November 2021 and June 2022, Nguonly says he lost about $80,000 by investing in crypto on margin. His losses include $30,000 of his original investment and an estimated $50,000 in unrealized gains. Investing with margin involves using borrowed funds to purchase an asset.
Nguonly says he had already made pretty hefty crypto investments in bitcoin and ethereum of around $40,000, plus a few hundred dollars in altcoins like shiba inu and dogecoin. But as bitcoin’s price went on a tear, he decided to buy more — about $15,000 worth — on margin.
For a moment, Nguonly says he was up about $50,000 as the price of bitcoin reached its all-time high. But at the end of 2021 the crypto market took a turn, and by the summer of 2022 bitcoin’s price crashed over 70%.
“I was investing with some money that I didn’t necessarily have,” Nguonly tells CNBC Make It. “Once the crypto market kind of reversed, my losses were amplified.”
Buying on margin: Know the risks
Investing on margin is a sophisticated strategy that can prove lucrative if your investments continue to perform well. But it amplifies your losses if the market takes a dip.
When you buy on margin, you’re borrowing money from a broker in order to invest more than you otherwise could have. As a result, you can boost your earnings, but are also at risk of losing more if the market goes the other way, as Nguonly experienced. Bitcoin’s price crashed so much he faced a margin call, meaning he had to sell a significant portion of his holdings to cover the cost of the loan.
To make a profit when buying on margin, your investments have to outperform the cost of the loan itself, which is…
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