How long can we afford to HODL Bitcoin? Can we and should we?
All of us are early adopters in the crypto space. Most people get the idea behind bitcoin and why it should succeed. Some possibly may only be in the space to speculate. However, the answer to the question in the title possibly lies in how one sees Bitcoin. Does one see it as sound money? Does one see it as a store of value? What happens if everyone buys bitcoin with the same thesis? Let's explore and ask a few more (many more) questions.
Whatever the thesis, the majority of people are HODLers. What about those people who believe Bitcoin is sound money and are also HODLers? Well, at some point one has to spend that money. If everyone who thinks bitcoin is money keeps HODLing, and never spends, then what is the incentive for them to ever spend it? What consequences does that have? Does one spend to afford all the luxuries in life and then save the rest? The consequences may be starker when one thinks from a capitalist point of view. If returns from HODLing far outweigh the returns from spending it, then there is no reason to spend. What happens in a scenario when Bitcoin has somewhat reached mass adoption (both retail and institutional)? Should an investment fund ever invest in any other asset class apart from Bitcoin and do portfolio construction and diversification? I guess no. Should you buy a new house or a luxury car? Guess not because sometime in the future, you may be able to buy both with the same amount of Bitcoin. May be even more assets and consumables a few more years later. Should a company invest in research? Should they manufacture? Should anyone do anything else to generate returns other than HODLing Bitcoin? I smell a growing vicious circle here. I guess BTC cannot be money. It will never get spent by the majority of HODLers. Of course, this is true only when BTC keeps going up parabolically. Also, this may be all a utopian scenario. Market participants are never the same and they also have different behaviors. They won't necessarily all think financially. However, I believe that most will. Can they force the others to all think in the same manner because HODLing by a majority is pushing prices higher and higher. I guess the situation where Bitcoin never gets spent isn't all utopian. BTC is not sound money. Maybe we all need inflationary money that forces us to spend what we have today and save some in stores of value.
So I guess, Bitcoin is a store of value then? Is HODLing under this scenario feasible? I do not know but I am ready to think out loud. OK, so it's an asset class for institutional financial players and a store of value for companies and individuals. However, we still can't ignore its parabolic rise. In today's scenario, BTC can afford a parabolic rise because the majority of the world doesn't get it. There is scope for more people to join the parabolic party and increase the network of adopters. However, the idea of the post is to think about how long can the exponential rise continue. So again, there is some sort of mass adoption. Financial returns from HODLing far outweigh those from consumption and investment. At some point in the future, of course, the Bitcoin rocket will slow down. People will then invest and consume. A deflationary store of value, a scarce asset may actually end up being a better store of value than cash, or savings account. However, what if there is another asset class that is more scarce than Bitcoin? What if that causes people to sell? Will that trigger an eventual parabolic run to the downside? Will people ever get back into the asset class. Will Bitcoin's source of glory be the reason for its demise?
I know I am thinking of very black and white scenarios. The reality is always far more complex than 1s and 0s. It is somewhere in between and there are infinite possibilities. I have also not considered the impact of the digital world that is being built - Defi, Decentralized Social Media, and much more. There is the possibility for bitcoin to find a use case as being sound collateral for lending in the long run. One may earn inflation-beating interest on it and even without the upside, one may want to HODL. In that scenario, it is possible for BTC to be both sound money and a store of value.
We'll know the answers when the time comes. Till then, nothing stops us from pondering and then commenting on my post in the comment section below.
