Money is Meant to be Spent, Not HODLed
Why Bitcoin is Not Yet a Short or Long Term Store of Value
Bitcoin can be used as money — as a medium of exchange. But it is not currently used very much, especially relative to its market valuation. Over $400B worth of bitcoin is used to conduct what my back-of-the-napkin estimate puts at one or two million daily transactions — about 1/30th what you might reasonably expect.
The explanation for this is simple: most bitcoin owners aren’t really using it to buy and sell but as an investment. Not using bitcoin for the most obvious use of money (as a medium of exchange) seems a little odd, but the defense of this position is that holding bitcoin as an investment is using it as a Store of Value — one of the other uses of money. Many in the bitcoin community have argued that using bitcoin as a store of value requires HODLing, or Holding On for Dear Life through bitcoin’s price swings in order to reap the long term benefits of what they view as bitcoin’s inevitable upward trajectory.
I am not against investing in bitcoin as long as one is able and willing to acknowledge and accept the risk that this upstart currency may fail — indeed that failure is the default. With this understanding, HODLing any high-risk high-reward asset may make sense. But bitcoiner’s don’t speak of “HODLing” that way. They aren’t advocating HODLing on for a small chance at a great gain; they are advocating HODLing because they believe bitcoin’s growth is safe and inevitable even though the path of growth is volatile. They are claiming that “HODLing” is really just “saving” and that bitcoin is a safe and reliable store of value. My aim is to examine whether that claim is true.
The Intrinsic Value of Money
Money is a medium. Medium is like neutral. Neutral means that you’d just as soon have it as anything else because you can use it to buy anything else. It’s nice to buy stuff now but you might want to buy stuff later, so you need to keep some money in reserve, but it’s not because you think the money is preferable to the stuff in perpetuity. In a way money (since it’s meant to be exchanged) is a method by which we overcome our natural loss aversion — our natural tendency to over-value the things we already own compared to what we don’t yet have. No one is supposed to have owner’s bias about money even when she saves it. It’s not supposed to be a good with intrinsic consumable value but a means of making trades for the kinds of goods that do have consumable value or that have the potential for yield. The value you get from money is the value you get from non-monetary goods and services either now or in the future. To the extent that you have a special relationship with your money such that you look at it, fondle it, dream about it, want to be buried with it, and never spend it — even for goods, services, or experiences that would be more valuable than the money — you’re said to be “miserly” and miserly is not rational. Being miserly is not considered a virtue because it helps absolutely no one, not even the one selfishly hoarding his money. Dickens point in A Christmas Carol was that Scrooge benefited just as much from spending his money as Tiny Tim did.
The value of this medium is realized in exchange. All of the value. There’s no value in a currency that can’t be exchanged. It’s not good for anything else. Not unless it’s a currency that’s sparkly like gold and can be shaped into non-currency things or kept as a collectable. You want the money you keep for later to hold its value so you can buy the same amount of stuff with it later, but the storage of value is dependent on the future exchange. If you knew for a fact that no merchants would accept hundred dollar bills in five years, then you could also know for a fact that your hundred dollar bill wouldn’t store its value. The value it stores is its usefulness and usage as a medium of exchange at the time in the future you want to spend it.
None of this is complicated economics. It’s not even complicated common sense. Another way of saying the above is that an essential attribute of money is that you buy stuff with it. If you can’t buy stuff with your money, there’s a good chance it’s not good money. If you don’t (in any timeframe) buy stuff with your money, there’s a good chance you’re not using it like money.
HODLer’s Strange Behavior
The term “HODL” likely entered the vernacular as a drunken misspelling, but it has been adopted as something of a battle cry for bitcoin, other cryptocurrencies, and (for awhile) the meme stocks. It expresses an all-in commitment to one’s asset of choice by Holding On for Deal Life. The term implies extreme price volatility: neck-vein-exposing, arrhythmia-causing, fingernail-flesh-wound-inducing declines from “my gosh” money down to “move back in with mum” and then eye popping euphoric climbs back into elysian fields full of internet millionaires. Hold On for Dear Life through the violent, wrenching jerks and bloody carnage of the asset’s downswings and you’ll be rewarded in the upswings, and presumably at some point with a price that won’t leave you grabbing the wind. The term also implies not selling, which (if the asset you’re HODLing is a currency) means not buying other things in exchange. In the case of certain high-volatility assets like GME, it’s possible that a HODL strategy makes sense, especially if you see deep f*****g value in the underlying business or if you’re just trying to put a squeeze on short sellers. Applied to bitcoin, however, all of this HODLing is extremely peculiar.
It’s peculiar, first of all, because everyone who is consistently HODLing bitcoin is not using bitcoin for one of only three things bitcoin can be used for: exchanging value between two people. Even stranger, HODLers also tend to be the biggest cheerleaders of HODLing, encouraging other bitcoiners to stack satoshis indefinitely — resisting the urge to unstack them to buy burritos, freshen up the living room, or pay the gas bill. If every bitcoiner was a consistent HODLer, bitcoin would never be used to buy anything. Each purchase of bitcoin would be its final resting place. This is a bizarre situation. Those who most want bitcoin to succeed are the biggest advocates of not using bitcoin to do one of the things it must do to succeed.
If you can get past the initial strangeness, there is a second layer of strangeness awaiting you. The reason HODLers HODL and encourage others to HODL is because in a relatively small market like that for bitcoin or for a particular stock like GameStop, a willingness to let go on the part of sellers decreases the price paid by buyers. This is a natural outcome of supply and demand. If few sellers are willing to supply bitcoin, then it doesn’t take as many buyers demanding bitcoin to keep price levels up. Conversely, if all the bitcoin HODLers decided to let go, it would flood the market with bitcoin driving the price of bitcoin down. If HODLers don’t hold on, then the price downswings become even more violent. HODLers need new bitcoin buyers because a surplus of buyers drives the price up, but if those buyers aren’t willing to HODL, then they contribute to the volatility when they sell. Since many new bitcoin buyers are more interested in bitcoin as an appreciating asset than as a medium of exchange, they are susceptible to the HODL dogma. No one wants their investments to go down and colluding together to HODL is a way for the bitcoin community to support and increase bitcoin’s price level.
The reason this behaviour is significant is because in the long term bitcoin’s price must approximate its value. In the short term, bitcoin’s price is merely speculative: a function of investor’s estimations of future demand for bitcoin. This speculative price point is supported by HODLing. In the long term, bitcoin’s price is dependent on its exchangeability just like the hundred dollar bill. It has to prove itself as a superior medium of exchange — a currency that merchants demand and people are willing to spend. bitcoin’s price must eventually reconcile with bitcoin’s value and bitcoin’s value is equivalent to its usefulness and usage as a medium of exchange. This value-based price point is undermined by HODLing because HODLing is not-using bitcoin as as a medium of exchange.
What HODLing Says About Bitcoin
I find the behaviour of HODLers telling. The perceived need to HODL by some of the most ardent bitcoin believers tells us something about how they think bitcoin measures up to the standard requirements of any currency. HODLing is supposed to be just saving a currency as a store of value, but it speaks to the other two roles of money as well:
HODLing a Unit of Account: Let’s start with the easy one. If bitcoin’s swings are so wrenching that you have to hold on for dear life then bitcoin is too volatile to be used as a unit of account. You can’t put the price in bitcoin on your store’s price tags because you would have to change the prices constantly to reflect the items’ real market value. Most bitcoiners would, I think, concede this point and most would say it doesn’t really matter in the short term. Eventually, they claim, bitcoin will stabilize and then take on this mantle. Maybe. In the meantime, the need to HODL is an admission that an item’s price in bitcoin doesn’t tell you anything about its value. Or more precisely, if I were to price an item in bitcoin, I would have to also give you the date and time of the price for it to be meaningful. Within the space of a year, a car that costs 1 bitcoin might be a new Porsche or a used Kia. Sometimes within the space of a single day, 1 bitcoin is worth a new Honda or one with 50,000 miles.
HODLing a Medium of Exchange: At a minimum, claiming to HODL indicates a reluctance to spend bitcoin even if bitcoin is an effective medium of exchange. But the need to HODL also says something important about bitcoin’s present viability as such a medium. HODLing implies a roller coaster ride of ups and downs and it’s not clear when, if ever, is a good time to exit the ride and make a purchase. Furthermore, HODLing also implies that the overall direction of the ride is steeply up and to the right even if the interim states might involve a decline. The reason you HODL is that you believe bitcoin is a more promising asset than almost any other possible investment and is therefore worth holding on to despite volatility. For a currency, this is problematic. If the medium of exchange is far more variable in price and has much greater upside potential than any of the things (whether tools, services, investments or consumables) you might buy with it, it makes it difficult if not impossible to make rational choices about what you purchase.
This is where money’s role as a medium of exchange intersects with its role as a unit of account. If your money doesn’t have a fixed value relative to the goods and services you exchange with it, then how do you decide which purchases are rational and which are not?
Consider, for instance, whether you should purchase a car. If you’re buying with a boring, stable currency like USD, you can focus your attention on the decision itself: whether you need a car, whether you’d rather have other things instead or whether it would be better to put the money in investments, whether (if you decide to buy) you should buy the red sports car or the blue SUV. Most of us have gone through this process in the past and most of us didn’t even consider the price of our money when considering the price of the car. We were aware that the $20,000 car today might cost $21,000 next year, but this marginal future increase made little impact on our decision.
The situation is different for the bitcoin HODLer. The bitcoin he owns might, in a matter of months, enable him to buy a Maserati instead of a Toyota. $20,000 in bitcoin might be worth $100,000 by summer. Of course, it might also be worth $10,000 but surely that trough wouldn’t last too long and would doubtless be followed by another all-time high. To complicate the decision process, the poor man may have purchased his bitcoin six months ago for $100,000 and HODLed it all the way down to $20,000, making a $10,000 car purchase feel like a $40,000 loss. Or he may have purchased his bitcoin for $10,000 and HODLed it all the way up to $20,000 making a $20,000 car purchase feel like a win (if it wasn’t for his fear of missing further appreciation). The thing to notice in all this is that the use of bitcoin as a medium of exchange renders the market price and personal utility of the car more or less irrelevant compared to the HODLer’s estimation of bitcoin’s future value. A car worth $20,000 that perfectly meets the HODLer’s needs and preferences might be listed at $10,000 and still be rejected because $10,000 in bitcoin might soon turn into $40,000. If prices are information, then pricing goods in a currency you have to HODL is fake news. For the HODLer, it feels like you’re losing future upside every time you exchange bitcoin for anything else, which of course is precisely the HODLer’s reasoning. If bitcoin is indeed the most promising investment to come along for decades then it doesn’t make any sense to part with it to buy pizza, toilet paper, or groceries, much less movie tickets or vacations.
Another way to think about all of this is that HODLers think that the market has underpriced bitcoin relative to its intrinsic value by one or two orders of magnitude. The market thinks a bitcoin is worth $23,000 when it’s really worth $230,000 or even $2.3M. Trying to use such a grossly mispriced asset as a medium of exchange is an exercise in frustration. It would be like visiting a foreign country where lunch at McDonalds costs $800, the taxi to the museum is a couple of grand, and the week’s stay at the Super 8 is $120,000. In such a country, you’d be inclined to HODL too.
Whether every purchasing decision denominated in bitcoin is made irrationally doesn’t much matter. Someone who owns only bitcoin would surely still buy bread and milk when he gets hungry. The point is that at the margin volatility in a currency’s price (whether up or down) adds a third dimension to market transactions which renders rational decisions much more difficult by turning market signals into noise.
Store of Value and Saving
bitcoiners are a hardy lot and not easily discouraged. Many would readily admit bitcoin’s present shortcomings as a unit of account and nascent adoption as a medium of exchange but retort that bitcoin is a great way to save for the future — a fantastic store of value. But is HODLing really just saving? Is bitcoin really a store of value?
Before we examine bitcoin’s real world performance as a store of value, let’s define our terms:
Saving: Saving is different than investing. I wholeheartedly agree with Saifdean Ammous’ definition of saving in The Fiat Standard when he says…
“any investment can suffer a complete and catastrophic loss of capital. Savings, on the other hand, are kept in the most liquid and least risky assets. The decision to go from saving to investing is the decision to sacrifice liquidity and increase risk in exchange for a positive return”
Thus, savings is far more concerned with downside protection than upside potential. You might say the definitional goal of saving is downside protection achieved in part by consciously giving up potential investment gains with their accompanying risks. The reason for this is simple: By having sufficient and sufficiently stable savings, you are prepared for the inevitable risks and shocks that life brings. Savings ensures that the accidents, injuries, busted radiators, and blown tires of life don’t ruin you. In a way, saving is an acknowledgement that risks will seek you out; you don’t have to go looking for them in risky investments. Importantly, sufficient savings also enables you to hold riskier, more volatile investments for the long term without being forced by circumstances to turn paper losses into real losses in order to pay for today’s emergencies.
Store of Value: As I’ve said, money’s role as a store of value is connected to its role as a medium of exchange. Money only holds its value for the purpose of some future exchange of that value for a good or service. In a way, “store of value” is just a restatement of money’s role in exchanging value across time. You can sell your labor to an employer in one year and (if you’ve saved up) buy food, clothing, and shelter the next year with the prior year’s excess income. Similarly, when you save up for a rainy day, for a down payment, or even when you set aside a little each month for routine yet cyclical expenses like property taxes or teeth cleaning, you are exchanging value with the future and expecting your money to store that value with little to no loss.
But how long does money have to store value to serve this function? What is the timeframe specified for a store of value? A day? A month? A year? Ten years?
The answer, of course, is all of the above. Since life is uncertain and the future is uncertain, you can’t know beforehand how long your money must store its value. As Ammous puts it, “Human life is lived with uncertainty as a given, and humans cannot know for sure when they will need what amount of money”. You may know for sure that you’ll have to pay $1,000 tax bill in April but you can’t know for sure that your water heater will spring a leak in May. In the very short term, you may know that you need to save $1,500 from your pay check for rent but you can’t know when you’ll stumble across the right deal for the lawn mower you’ve been needing.
If the timeframe in which value must be stored is long, your options for how to store it increase dramatically. You may not know, for instance, whether you’d want to move to Mexico after the kids are out of the house, but if your youngest is 8 years old, then your store of value need not be liquid. You might even want to take a modest short-term risk that the value you store in an investment asset would go down in exchange for the likely prospect that it will appreciate in value over time. You might decide to buy farmland, rental houses, stocks, or bonds expecting they will appreciate in value over a 10 year period. None of these assets are completely liquid and you’d never use any of them as a medium of exchange, but they serve the function of long-term store of value very well. The longer the timeframe in question, the less liquidity matters and the wider your options.
Is HODLing Really Just Saving?
With those details under our belt, let’s look at bitcoin as a savings vehicle. Bitcoin’s price at this writing is $23,000 per bitcoin even though its price was effectively zero when Satoshi Nakamoto developed bitcoin in 2009. Starting from $0 and ending with $23k makes for easy math when calculating whether bitcoin has stored value over this 14 year period. One could argue from this data that bitcoin is a great store of value. However, along the way, bitcoin’s price has been anything but stable, ranging up and down, sometimes losing over 50% of its value in a matter of days only to gain it back again a month or two later. Bitcoin has also, on several occasions, breached a previous high only to drop down again for months or years. Today’s price of $23,000, for instance, is roughly even with bitcoin’s price five years ago in December, 2017.
Due to these oscillations, bitcoin is not a reliable short or medium term store of value, risky or otherwise. If your $1,000 bitcoin pay check might be worth only $600 the next week or $300 in six months (as has happened many times in the chart above) then most people would be forced to seek out a different currency like USD for boring predictability in those timeframes. Bitcoin might also have gone up in those timeframes, but downside protection is much more important than upside potential when you’re talking about groceries and an emergency fund. This is particularly true for people living from hand to mouth. It might very will be true that you’d see your bitcoin appreciate if you held on, but in the meantime, you’ve got to buy bread for your kids and gas for the truck. If your pay check Friday afternoon depreciates by 30% en route to the grocery store, your reaction is unlikely to be philosophic. You will not, at that moment, be receptive to arguments that bitcoin is a store of value because it did not store the value you trusted it with for the timeframe which was important to you — a timeframe which would have been uneventful using any of the major fiat currencies. Similarly, if you set aside $10,000 worth of bitcoin in an emergency fund and eight months later, you find it has stored less than the value of a $3,000 set of brakes and rotors, it will be little comfort that “in the long run” bitcoin has outperformed USD.
But what about the long run? Bitcoin has outperformed the dollar over most 5+ year periods but only if you disregard the most important consideration when saving: risk. Without adjusting for risk, AMZN, TSLA, and MSFT have also beaten the dollar as long term stores of value, but of course the risks of owning these individual stocks are quite high. Each individual stock might go to zero as history has proven many times. An asset like a growth stock that is high-risk and stores value only in the long term doesn’t square with the definition of “saving” promulgated by Ammous: that saving is a hedge against uncertainty and risk across an indeterminate timeframe. So if (as Ammous contends) bitcoin is a great store of value for the purpose of saving, then does that mean that it is low risk?
What Do You Have to Worry About?
Since bitcoin is not used widely as a medium of exchange and not used at all as a unit of account and since its price is too volatile to be used as a short or medium term store of value, the long term is all that is left. But for this slim monetary role to qualify as saving vs investing, it has to be almost risk-free. So is it? Is there a non-zero possibility that bitcoin might not succeed as spectacularly as the HODLers hope or perhaps even fail completely? And if not zero, then what is the probability of failure? 10%? 50%? 90%?
The narrative in the bitcoin community is that bitcoin is “monetizing” slowly but inexorably just as other assets like shells, silver, and gold have done in the past. It will, they say — due to its limited supply and superior monetary attributes — eventually absorb a significant portion of world trade into its ecosystem. It’s worth noting, though, that while new forms of money have come and gone, the process bitcoiners describe is unprecedented in several ways:
- The modern world has never seen a purely digital currency before. There has always been some physical representation, whether coins or bills.
- The modern world has never seen a completely decentralized currency before. Past currencies have always been tied at the hip (for better or for worse) with governments that have jurisdiction over a physical territory and the ability to make laws for and impose taxes on the residents of that territory.
- The modern world has never seen a currency meant for everyone’s use which was available all at one time. Other currencies have all been limited in application to specific populations even though some have gained wider acceptance over long periods of time.
In short, the people of the world have never been offered a choice before between a government-backed currency and a community-backed alternative on nearly the same scale as is happening with bitcoin. Who knows how it will play out. The risks that bitcoin faces in this process are both many and serious. Any one of a dozen developments might shrink bitcoin’s potential or bring its value to zero. Here are a few of the objective risks:
Technology Risk: I start here because I believe these risks are the least consequential to bitcoin. They can, in all likelihood, be overcome, and they are the most predictable (which is not to say that they are either trivial or predictable). Nevertheless, the bitcoin developer community will have to scale from a million or two transactions per day to billions of daily transactions without compromising security, reducing settlement speed, or pushing transaction fees too high. Along the way, they will undoubtedly face difficult trade-offs regarding the relative priority of decentralization, privacy, simplicity, and other core tenants which may influence people’s willingness to use bitcoin. To give just one example, you can’t scale transaction capacity on-chain without increasing the block size but you can’t scale transaction capacity off-chain without increasing complexity, decreasing security, and increasing counterparty risk.
Competitive Risk: Bitcoin holds only 40% market share in the cryptocurrency market after starting with 100% share in 2009. Most of these alt-coins are (as the bitcoiners are quick to point out) little more than speculative junk, but so are nearly all the new entrants in an emerging market. In the technology market, “death comes from below” — from junk technologies suitable only for fringe minorities that are given just enough of a foothold to grow unmolested out of the mainstream where they are free to innovate. Over time, these upstarts often not only challenge but overthrow the leading technology. This is the core message of Clayton Christensen’s classic book The Innovators Dilemma.
Bitcoin’s competitive threats don’t stop with other cryptos. Currently 99% of the world uses government-backed currencies for all their daily transactions and the remaining 1% uses government-backed currencies for 90% of their daily transactions. This gives bitcoin room to grow in a big market, but it also means it must compete with government-backed monopolies that — in most rich countries — issue reasonably stable, usable currencies supported by extensive monetary networks. It’s difficult and perhaps unlikely, but it is also possible for these government competitors to step up their game by beginning to exercise more maturity in their monetary policies if they feel threatened.
Thus, bitcoin is bracketed competitively by wild-west innovators in crypto with nothing to lose and everything to gain — most of whom will fail but some of whom will find a foothold in the market and grow — and stodgy, entrenched monopolies with longstanding government support.
Oh, and a competitive risk assessment would not be complete without at least mentioning that if bitcoin’s hot growth prospects appear to cool, the wildest of the speculators will head for different casinos. For those who own bitcoin purely because it offers the highest return on investment, “competition” is not other currencies but any other investment that better matches their risk/reward preferences.
Regulatory Risk: Bitcoiners are quick to point out that governments can’t ban bitcoin because you can memorize a seed phrase to unlock a bitcoin wallet and the idea of bitcoin is imperishable. This sort of wishful philosophizing entirely misses the point. Regulation doesn’t have to be categorical to be decisive. All it has to do is make one option marginally less attractive and another option marginally more attractive. People may prefer apples, but if apples are sufficiently taxed and pears are sufficiently subsidized, eventually the “preference” will flip. Most of us are, after all, burning corn in our engines just because it’s marginally cheaper and more convenient than finding a pump with pure gasoline. It’s cute when the bitcoiners glibly raise the bird to government intervention but as soon as government-mandated surcharges start to appear on receipts paid with bitcoin and capital gains from bitcoin (even those at the point of sale) are re-classified as ordinary income for tax purposes, the giggles will stop.
The truth of the matter is that governments don’t have to do very much (and certainly don’t have to impose bans) to make the use of cryptocurrencies like bitcoin much less attractive. They don’t have to outlaw thought or speech. They just have to make a $1.00 bitcoin purchase cost $1.20 — and perhaps require merchants to have a registered, certified crypto-clerk on staff who must fill out customer information forms every time he accepts bitcoin payments.
Market Risk: The HODLers think everyone will love using bitcoin. Everyone will love bitcoin even though many people have never heard of it, most people have never owned it and most owners don’t use it. Perhaps the greatest risk to bitcoin’s growth is that we reach a point where people just aren’t that into bitcoin anymore — now that it’s not growing as fast or now that they started using Etherium or now that inflation eased up or now that they found something else more interesting or because they had a baby and need to save up for a minivan. Markets are made up of people and people are funny creatures. They don’t always make rational decisions and they don’t often herd where you’d like them to herd. There are 99 possible reasons for why the 99 percent of people not into bitcoin might not ever get into bitcoin. Some of these reasons make sense and some of them don’t. Some of them are based purely on perceptions formulated in youth based on faulty premises. As just one example, the world is not using the one known route toward nearly limitless clean energy. About half the reason for this is a tangled web of misconceptions and the other half is some combination of legitimate concerns and doomsday scenarios. And let’s not forget, as soon as Bill Gates adopts bitcoin, some portion of the world’s population will find conspiratorial significance to the transactions listed in bitcoin block 666,666. Why people adopt one technology but don’t adopt others is always completely predictable, but only in hindsight.
People’s web of preferences and preconceptions will also change. We’re just not sure how they will change or what they will change into. The monetary system of the 1920s may have been perfectly adequate for the day, but no one could have anticipated the new requirements placed on that system with the payment methods of the 1950s, the cryptography of the 1970s and the internet of the 1990s. A statement of preferences in 2023 like “I do most of my shopping online with a card but I use Apple Pay when I go out and PayPal with my friends” would have been unintelligible to a banker in 1923. He would not have had categories for any of today’s preferred payment methods. We don’t yet know whether bitcoin satisfies the preferences of the people who have not yet adopted bitcoin. We certainly don’t know whether it will continue to satisfy future preferences we don’t yet have the mental concepts to describe.
Bitcoiners have explanations for how bitcoin overcomes each of these risks — some quite convincing and some quite amusing. However, even if all the explanations are legitimate, the risk level in each of these categories does not fall to zero. Furthermore, the cumulative risk is a multiple of category risk times number of categories compounded by the timeframe under consideration. Even if there’s only a 5% chance that bitcoin will encounter major technological roadblocks, a 10% chance that another cryptocurrency will pose a serious competitive threat, a 15% chance that governments will successfully preference their own currencies, and a 20% chance that not all people will universally love bitcoin, the combined risk profile doesn’t peak at 20%. In any given year, a ninety-year-old man may be highly unlikely to die from any one of dozens of conditions, but that doesn’t make it likely that he’ll reach his 100th birthday. Risks multiply times the number of vectors and compound with time.
But in order for bitcoin to retain its status as a store of value — a savings vehicle — it has to be practically risk free. If a long-term store of value has a 50% chance to lose 50% and a 25% chance to lose 100% over a ten year period, then it’s not actually a long term store of value. When you factor in risk, HODLing bitcoin looks more like investing than saving. In order to assert that HODLing actually is saving, you have to ignore or dismiss the risks to bitcoin’s future.
When Can We Let Go?
The dilemma into which the HODLers have wedged themselves is a deep one. If they let go now and begin spending their bitcoins like dollars, they not only give up what they see as substantial future upside but may also undermine bitcoin’s current price point by increasing the supply from bitcoin sellers without increasing the demand from bitcoin buyers. On the other hand, the very fact of their HODLing is an advertisement for bitcoin’s current shortcomings as a currency — that it’s too risky, volatile and mis-priced to be a unit of account, a medium of exchange, or a stable store of short or long term value. One might legitimately question, if our world is in such desperate need of a new currency, how HODLers are able to get by using dollars in the marketplace while they stack satoshis.
The risk to HODLers is that while they sit on their bitcoins hoping for them to grow and one day hatch, the rest of the world may gradually become aware that of the 100 million people who own bitcoin, most are reluctant to use them for their intended purpose. Perhaps (the world might think) this reluctance points to some deeper value embedded in the very fibers of bitcoin which only HODLers experience. But perhaps (just perhaps) the impulse to HODL rather than spend is because bitcoin is ill suited to the role of modern money or (worse) is simply not superior enough to standard currencies to convince even its most devoted fans to start spending it instead of spending dollars.
There is a path through the horns of this dilemma, but it is a difficult one. If all bitcoiners HODL their coins, then this limits the supply of coins and this (if the demand for coins is stable) should increase bitcoin’s price. An asset which is increasing in price is inherently interesting so this might attract yet more buyers. If most buyers are converted into HODLers, then this keeps supply levels low further bolstering the price of bitcoin. In this way, the majority of the human population may become bitcoin investors (who use bitcoin like a stock) even if very few are bitcoin users (who use bitcoin like money). Once everyone has bought into bitcoin, it will have achieved equilibrium in price which might (assuming no technical, regulatory, or competitive roadblocks) make it stable enough and safe enough to use just like normal money without the drastic contortions required at today’s volatility and risk levels. Presumably, the world economy could then merely flip the switch over to a bitcoin-denominated marketplace.
It could happen just so and we might live happily ever after.
It also seems possible to me (probable?) that unless the HODLers can loosen their grip on their coins and start acting as bitcoin users not merely as bitcoin investors, that bitcoin will never get the practice it needs to have a chance at becoming a real currency. They say becoming a virtuoso violinist requires 10,000 hours of practice. Perhaps 10,000 transactions per bitcoiner would do the trick. Merchants might at least start to wonder why so many former HODLers were pestering them to accept bitcoin. The price of bitcoin might indeed collapse in the short term but it might come back. Regardless, Not-HODLing would allow bitcoin to do what bitcoin is supposed to do. It might allow bitcoin to prove its usefulness as a currency before we bid it up to $1M per coin instead of HODLing bitcoin to $1M per coin before realizing that our money can’t be spent.
