We’ve all seen stories of people who spent 50 Bitcoins on a motherboard 5 years ago, or bought 100 Bitcoins for $10 and thought they were brilliant when they sold them all for $100 less than a year later (they would be sitting on $1,890,000 today). And of course there’s the epic 10,000 Bitcoin pizza purchase by Laszlo Hanyecz on May 22, 2010. Those pizzas cost $85 million at today’s Bitcoin prices.
It’s horrifying to think you might have thrown away $85 million on two pizzas, but even more horrifying is the inability of so many, especially those in traditional finance and economics, to fully grasp the implications of Bitcoin of the global economy.
One case in point is Nobel Prize-winning economist Joseph Stiglitz’s failure to grasp it.
Just several weeks ago Mr. Stiglitz was being interviewed on Bloomberg television and said about Bitcoin:
“Bitcoin is successful only because of its potential for circumvention, lack of oversight…It doesn’t serve any socially useful function.”
How can someone so intelligent be so wrong. Bitcoin has many useful functions, including its decentralization, its resistance to censorship, and perhaps most critically for the purpose of this article, its deflationary characteristics, which reward those who hold Bitcoin rather than spending it right now.
The “Pathology of Hoarding”
A long-time knock on Bitcoin is that it isn’t suitable for use as a currency because of its fixed supply (only 21 million Bitcoins will ever be created), and it’s volatile, but generally upward price trend. Detractors claim that these characteristics of Bitcoin encourage hoarding of the digital currency. But isn’t holding Bitcoin in anticipation of an increase in its value just investing, or at its core just saving?
When detractors call holding Bitcoin “hoarding”, what they are really doing is creating a negative connotation around the very concept of savings, something which should be considered virtuous. I think the reason Bitcoin is so popular with the Japanese and South Koreans is that both countries have historically had very high personal savings rates (although that has recently declined sharply in Japan under Abenomics). These are countries whose citizens have a savings mentality, and they recognize a store of value when they see one.
When you have a currency that increases in value like Bitcoin you are far less likely to spend it as you would the U.S. dollar, which has given up roughly 96% of its value since the Federal Reserve was created in 1913 – the birth of inflationary fiat currency. The consumer society that grew up around that inflation simply won’t exist with a currency that continues to increase, rather than decrease, in value.
The proof of that goes back to those people who now regret spending or selling their Bitcoins five or three years ago, or even last year in many cases. Millenials who once hadn’t the slightest concern with the future or saving for it are now looking at 20-30 time horizons when they consider their investments in Bitcoin and cryptocurrency. I’d say that’s a pretty significant shift to a saving mindset. The same thing can be seen here on Steemit, where powering up your Steem is a far better long term investment when compared with simply withdrawing any SBD you make.
Looking Towards the Future
There is an article on CoinDesk from last July in which editor-in-chief Pete Rizzo wrote:
“I once asked two high-profile developers if they cared if they even lived to see bitcoin become what they envisioned. They seemed to think that this was unlikely, and didn’t seem worse off for the realization.”
This is the mindset of the core Bitcoin developers and visionaries. It doesn’t matter when the payoff comes, they will continue working towards the ideals of a decentralized currency that allows the world’s citizens to take back their economic power from governments and corporations. Thus, one of the core principles in Bitcoin’s development is long-term value creation – or savings for wealth creation.
It’s awfully strange then to see someone like Warren Buffet, who made his fortune with a philosophy of long-term value creation, calling Bitcoin a terrible investment. Stranger still when he recently co-signed an open letter calling out Wall Street corporations and funds that are “too obsessed with quarterly earnings forecasts” and suggesting they need to focus instead on “long-term prosperity”.
And given all the negative press and talk of bubbles surrounding cryptocurrencies, Buffet isn’t the only one who talks about long-term value creation while patently dismissing an asset which has been created to do that better than any other asset or organization in the history of mankind.
Driving Lambos on the moon is all well and good, but that isn’t why Bitcoin exists, and it also isn’t why it, and other cryptocurrencies, continue to see skyrocketing growth. No, it isn’t about flashy materialism. The core Bitcoin community knows there’s been too much of that. Bitcoiners don’t want to spend, they want to hodl (read:save) because that’s how true long-term wealth is generated – for everyone.
Of course there are no guarantees that prices will continue going higher. In 2011 and 2013-2015 Bitcoin fell roughly 90% from its then highs, taking over a year to recover and rally higher once again. And while it has recovered from past drops, there’s no guarantee that it couldn’t fall and never recover, although that becomes less likely as institutional money begins to pour into the space.
All things considered, Bitcoin looks like a great store of value over its nine year lifespan, assuming you have the patience to wait for it to climb to new heights. And for those who wonder about spending cryptocurrencies, there are others in the wings which would be more suitable as transactional, inflationary currencies. I’m thinking of Litecoin and Bitcoin Cash off the top of my head, but who knows what the future might bring as the cryptocurrency space begins to mature.
And when you consider the dismal savings rate in the U.S. currently, a cryptocurrency that changes our mindset back to the savings mindset of our grandparents seems to be a very useful invention.