The knee-jerk reaction by most financial advisors is to scoff at the idea of borrowing to buy bitcoin. But what if this decision is the rational choice after weighing the facts, risks and opportunities?
Here are just a few facts:
The US dollar has lost over 98% of its value since 1913.
The US National Debt is over 20 trillion. The only way they can deal with this is to default or print more money – either way they destroy the purchasing power of the currency.
In a situation where the world accelerates the “flight to real values”, one of the most attractive destinations will be bitcoin due to its scarcity and security. Capital always flows to where it is respected and protected. Bitcoin offers a refuge like no other.
Ask, what are the odds that bitcoin will continue to appreciate at a faster rate than what you are paying on the borrowed debt?
Here are some historical examples of borrowing non-scarce assets (fiat money) to purchase scarce assets:
It goes without saying that people have been borrowing to purchase real estate for some time now because it has historically been a great hedge against inflation. The one thing we can practically count on is that politicians and central bankers like to print money.
Post WW1 Germany
The German government, struggling to pay war repatriations, resorted to the running of the printing press. Financially astute Germans (which included many of the Jews) saw the writing on the wall. They mortgaged and bought up as many assets as possible – primarily businesses and real estate. They leveraged their purchases by putting the smallest down payment possible and obtained long-term, fixed-interest rate debt – payable in German Marks. Within a few years (1917- 1924), after the currency was destroyed by hyperinflation, they were able to pay off all these mortgages for the equivalent cost of a postage stamp. The end result was enormous wealth and free and clear assets. Tragically, this led to widespread resentment of the Jews which helped fuel the rise of Hitler (take heed bitcoiners, you could quickly become the new “hated class”).
If you do decide to borrow, make sure that the debt can be paid back with only fiat. Make sure that it is long-term, fixed-interest rate debt. You don’t want any adjustable rate mortgages. Figure out how you plan to service the debt if the bitcoin profits fall short and decide if you are willing to accept the consequences if you are unable to.
If you fully understand the risks and opportunities – and are willing to accept them – then this sophisticated arbitrage strategy may make sense for you.