Why borrowing money to buy Bitcoin is ‘downright stupid’

Core Insights - The article discusses the differences and similarities between traditional finance and cryptocurrencies, emphasizing that while some financial principles remain applicable, cryptocurrencies represent a new form of financial innovation [1][2]. Group 1: Financial Activities - Finance fundamentally consists of three activities: lending, investing, and insurance, with all financial products fitting into these categories [1]. - Financial innovation historically aimed to reduce friction in these activities or obscure them, whereas cryptocurrencies are seen as a genuine innovation [2]. Group 2: Decentralized Finance and Tokenization - Tokenization allows for the breakdown of large claims into smaller ones, and decentralized finance (DeFi) aims to replicate financial market functions by eliminating intermediaries [3]. - Bitcoin serves as a modern tool for insuring against currency debasement, although its effectiveness as a transaction currency remains questionable [3]. Group 3: Risks and Historical Context - The article critiques the notion that DeFi will completely eliminate middlemen, suggesting it may instead facilitate rent extraction by a concentrated financial industry [4]. - The wisdom from traditional finance warns against leveraging borrowed money to invest in volatile assets like Bitcoin, labeling such strategies as imprudent [5][6]. - A described strategy in the crypto world, known as "looping," mirrors old financial schemes and poses significant risks, akin to a pyramid scheme [6][7].