@ Bitcoin Infinity Media

This is a part of the Bitcoin Infinity Academy course on Knut Svanholm's book Bitcoin: Sovereignty Through Mathematics. For more information, check out our Geyser page!

Holding On

In the old days, we Scandinavians had to save in order to prepare for the long winter. We chopped wood and salted meat in order to survive. In our current age of consumerism, however, we’ve forgotten all that and we pilgrim to the shopping malls as much as everyone else. No one seems to even have a savings account anymore. Interest rates are low, and we’re told to borrow and spend as much as we can. We’re bombarded with advertising for loans, mortgages, and financial services on a daily basis. Why? Because of our inability to understand the nature of money and its mechanics. Inflation is the underlying force that makes us squander rather than save. Inflation hinders us from reaping the fruits of our labor whenever we see fit, and it makes that very fruit rot. Bitcoin reverses the rotting process and provides us with a means of transporting the value of our labor not only through space but also through time.

The Stanford Marshmallow Experiments was a series of studies on delayed gratification conducted in the late 1960s and early 1970s. In these experiments, children were given a marshmallow or a cookie and were told that they would receive an additional one if they could control their urges and not touch the first one for fifteen minutes. Follow-up studies found that the kids who were able to resist the temptation of the first cookie tended to score better on SAT tests, have lower BMIs, and higher incomes than their less disciplined counterparts. Investing in your future self — in other words, resisting present temptation by delaying gratification — is the most effective skill you can cultivate for a brighter future. You reap what you sow. This can be described as having a low time preference. Having a low time preference is a fundamental factor in the economic success of any human endeavor. Not trying to catch fish with your hands for a couple of days in order to construct a rod or net when on a deserted island might make you hungry during those sacrificed days, but it will provide a better chance of catching fish in the future. Likewise, learning new skills now might lead to a higher salary in the future. Unfortunately, our current monetary system distorts our perceptions and incentives and favors those with a higher time preference — those who spend rather than save. We’re at a different point in history than the above-mentioned marooned fisherman. "Give a man a fish and feed him for a day, teach a man to fish and feed him for a lifetime," the saying goes. The ultimate goal should be to teach mankind to teach itself how to fish. What our current paradigm endorses is “give a man enough distractions, and he will stop thinking about finding better ways to support his loved ones and will succumb to whatever narrative you fill his head with, to make him work for you through taxes and inflation instead of for himself.”

In Bitcoin, people with a low time preference win. If you can resist the urge to sell, you will be rewarded in the future. The Bitcoin community refers to not selling as HODLing, which originated when a bitcointalk.org forumer named GameKyuubi misspelled the word holding in a now-famous post titled "I AM HODLING." The post became one of the Bitcoin community’s most prominent memes and a battle cry to resist the urge to sell during bear markets. Bitcoiners who have decided never to sell most or all of their holdings are referred to as HODLers of last resort. This term is not to be confused with the central banking term lender of last resort. The yearly highs in the price of Bitcoin are arguably less interesting than the yearly lows, which are practically decided by these HODLers of last resort. Considering its limited supply, all that Bitcoin needs to keep rising in price over the medium and long term are these people. Adoption and other metrics of measuring the success of Bitcoin are all dwarfed by the currency’s remarkable rise in value since its inception. The price has increased by a factor of ten approximately every three years. The best guarantee we have that it will keep doing so is Bitcoin’s limited supply combined with the HODLers of last resort.

In the Bitcoin space, and even more so in the cryptocurrency space on the whole, there’s a lot of talk about usage and adoption. We’re shown metrics of trading volumes and merchant acceptance, and we’re led to believe that these correlate with the short and long-term value in one way or another. While there may be truth in some of these theories, the most basic function of a deflationary asset is overlooked and rarely mentioned — the elephant in the room, so to speak. The best use for a commodity as scarce as Bitcoin is not to spend it or even to trade it but to save it and hold it for as long as you can. By doing so, you limit the number of coins in circulation. The more people that do this, the harder it will be to come by and the higher its price will be. Nothing on Earth is as scarce as Bitcoin. Nothing is as irreplicable, as immutable, and at the same time as portable as Bitcoin — its unique history and resistance to change have already proven this over and over. Its absolute scarcity is what gives Bitcoin its value, and ironically enough, this seems to be the hardest thing for people to understand about it. What if everyone in the network became a HODLer and decided to never sell, wouldn’t the network just slowly come to a halt? Not at all. Everyone has a price. Few would resist selling some of their Bitcoin if it could buy them a small city. There are price levels for each HODLer where reallocating financially may be a wise thing to do. A Bitcoin is also very divisible: The smallest unit, the satoshi, sometimes referred to as a sat, is one-hundred millionth of a Bitcoin. Even smaller units are made possible with the introduction of the Lightning Network, albeit not in the actual Bitcoin blockchain. Together, this enables Bitcoin to be highly saleable even at astronomical price levels.

What not having sound money has done to us is simply unfathomable. Imagine every person on Earth knowing that every transaction they’ll ever make will have a real impact on their future prosperity. We’re so used to inflationary currencies that most people don’t even realize why sound money is important. We’re so used to having a large cut of our income silently taken away from us that we don’t even realize how much of our day we spend working for someone else. Wars are funded by inflation. Imagine how many man-hours were put in by people who didn’t realize they were actually working for a war machine funded by a corrupt currency during World War II. Every time you use a fiat currency, you legitimize counterfeiting. Every time you use Bitcoin, you promote sound money. In fact, every time you don’t use your Bitcoin but save it instead, you promote sound money because sound money increases in value when the total number of coins in circulation is limited. It all sounds a bit magic and far-fetched, doesn’t it? Increased value over time, no matter what happens? Well, that is why many of us so-called Bitcoin Maximalists are so excited that we put our careers at risk for this technology. Once you realize what Bitcoin is and what it will do for the world, there is no way of un-realizing it. It really is mind-blowing.

At the beginning of time-that-actually-is-money — in other words, around 2009 — Bitcoin was mostly considered a toy for the cypherpunk movement. As its price started to grow rapidly, a small group of early investors became very wealthy, which in turn spawned a media hype around the phenomenon. Mainstream media remained largely skeptical, portraying Bitcoin as a pyramid scheme, a tulip craze, or a bubble at best. Most journalists simply couldn’t understand how an asset seemingly created out of thin air could have any long-term relevance. Some were frustrated because they thought that they’d missed the train. Many still do. In a world where companies like Google, Facebook, and Amazon can rise from zero to world dominance in a decade, people tried to find the Next Big Thing — the next Bitcoin. This attracted charlatans and scammers to the field who launched hundreds of altcoins, claiming to someday be technically superior, faster, or more privacy-focused. What the snake-oil salespeople omitted were the crucial facts: their new coins and tokens were not decentralized (and therefore neither immutable nor censorship-resistant), did not have a fair distribution, and so on. What most people still don’t get is that if Bitcoin doesn’t work, nothing will. This is humanity’s best shot at sound money. It is also, very likely, our only shot at it.

Many venture capital firms, hedge funds, and retail investors were bamboozled by the buzzword frenzy and invested great sums in these quack tokens. This generated confusion in the market as many altcoins increased dramatically in price at an even higher rate than Bitcoin. Due to human nature and a lack of understanding of basic monetary economics, the bubble grew bigger and bigger until it inevitably popped and wiped out most of the useless alternative cryptocurrencies. Bitcoin experienced ups and downs as well, but they were less volatile. Bitcoin bottomed at levels well above the beginning of the previous bull run and then resumed rising just as it had done several times before. The victims of the altcoin craze will take note of this. They will learn the hard way what separates the original from the copycat. They will see the undisputable superiority of sound money. It’s just a matter of time. Time, which is money.

Every time the people of Venezuela, Turkey, Argentina, or Zimbabwe are screwed over by their respective central banking authorities and turn to Bitcoin to preserve their savings or income from rampant inflation, the world becomes more aware of Bitcoin as a store of value. In comparison to the Venezuelan Bolivar, there was no crash in Bitcoin at all. There’s also a good chance the really big players will accumulate aggressively during the next bull market, given that Bitcoin, for the moment, still represents a very small allocation of institutional and hedge fund investment. Consider what will happen when institutional investors and a growing number of larger nations start to see Bitcoin’s potentially limitless upside. At this point, central banks will start to accumulate Bitcoin in an attempt to keep up with reality. This will legitimize the technology even further.

It is still unclear when this will all play out. When it does, however, it will be the largest transfer of wealth from one medium to another in human history. Early investors, many of which are technically competent, will become financially independent and, therefore, able to contribute to the ecosystem full-time. More and more people will demand payment in Bitcoin for its ability to store value. Remember that the next block reward halving is just around the corner and that Bitcoin will have an even greater stock-to-flow ratio than gold in just a few years. After the halving in 2020, Bitcoin will have a supply inflation rate of approximately 1.8%, which is lower than the US Federal Reserve’s target 2% price inflation rate. It is important to remember that Bitcoin is still an experiment. Should the experiment work, however, hyperbitcoinization is just a matter of time.

The implications of giving everyone on Earth the ability to rot-proof the fruit of their labor and transport its value through time are hard to overstate. The closest thing we’ve had to it historically is gold, but gold is not very divisible and not very easy for the general public to get their hands on. More importantly, gold is not absolutely scarce. No one knows how much of it there is left buried in the Earth's crust. Investing in real estate has also been seen as a good store of value throughout the ages, but real estate needs a lot of maintenance and is not cheap to hold on to. Real estate is also relatively easy to confiscate in the event of political collapse. Bitcoin provides us with the potential ability to store any amount in our heads and pass it down through generations without anyone ever knowing we had it in the first place. It effectively endows each individual with the power possessed by the feudal kings to turn people into knights. Any bitcoiner can now dub any no-coiner into a fully-fledged time-proof bitcoiner.

About the Bitcoin Infinity Academy

The Bitcoin Infinity Academy is an educational project built around Knut Svanholm’s books about Bitcoin and Austrian Economics. Each week, a whole chapter from one of the books is released for free on Highlighter, accompanied by a video in which Knut and Luke de Wolf discuss that chapter’s ideas. You can join the discussions by signing up for one of the courses on our Geyser page. Signed books, monthly calls, and lots of other benefits are also available.