Why Spend Bitcoin?

Nothing causes people to lose their economic sense more than Bitcoin. I’ve had quite a few opportunities to highlight economic fallacies on this blog over the years. This time I’m going to call out Fred Wilson for this comment:

And that point is that you can’t keep spending something that goes up as much as Bitcoin has.

So I don’t spend Bitcoin anymore.

I hold it.

It’s a store of value now.

That much is clear.

Fred is an investor in the company I work for so I’ll try to take it easy on him :p

I see sentiments like this almost every day expressed on Twitter or Reddit. And it’s frustrating. Not just because I’ve spent several years now writing code for a project intended to get people to, you know, spend Bitcoin but more importantly because I view Bitcoin as a tool of liberation that will fall far short of its revolutionary potential if it becomes nothing more than a speculative trading asset.

But what about the underlying argument that you can’t spend something that goes up as much as Bitcoin has? I say it’s nonsense. Why? Let me offer a thought experiment first before getting to the point.

Using the same logic could not someone argue that it makes no sense to spend $250 on groceries when Bitcoin is going up so much? You say, “Well dollars aren’t skyrocketing in price”. Sure, but dollars can be easily converted into Bitcoin (with a small transaction cost). By spending money on food you are foregoing an opportunity to invest in Bitcoin. So what’s the difference? If it makes no sense to spend $250 worth of Bitcoin on groceries does it not also make no sense to spend 250 dollars on groceries as well?

The difference is the $250 you’re spending on groceries is coming from income you’ve earmarked for consumption spending. We all have living expenses after all. When we earn income we make a conscious decision to invest some (maybe in Bitcoin!) and spend the rest. When we spend money on things like groceries, entertainment, or coffee, we aren’t drawing down on our savings (most of the time), we’re just spending funds we planned on spending anyway.

I’ve spent quite a few Bitcoin over the years. You know how much of that came from my Bitcoin war chest? Zero. I first bought Bitcoin for less than $10 and that UTXO is still sitting there in the UTXO set. But that doesn’t mean I don’t spend Bitcoin. I’ve just only spent income I had already planned on spending. I suspect if you add up the current value of all the Bitcoins I’ve spent it would amount to a pretty penny. But I don’t feel even the slightest bit of remorse for having spent those coins because, again, I was going to spend that amount regardless of whether the value was denominated in Bitcoin or dollars. Now I do kick myself for not having a higher savings rate (I think everybody does), but I don’t loose any sleep over spending income that I had already planned on spending.

So should you spend Bitcoin? Of course! Next time you get paid, figure out how much you want to spend and how much you want to invest. Make your investments (preferably in Bitcoin) then take 10% of the remainder and convert it to Bitcoin and spend that online or in the various stores in your area that accept it. You’re only losing out if you don’t do that.

15 thoughts on “Why Spend Bitcoin?

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  2. Absolutely. Glad to see more voices taking a position for accounting literacy here.

    Put it another way, bitcoin can always be dollarized from an accounting perspective anytime it is hedged, used for a purchase or sold spot. The price discovery for bitcoin against dollars et al. is in fact a series of these dollar-accountable events. Low velocity is what turned the low-inflation, high growth environment of the 80s and 90s into the low inflation, low growth macro of today. A broadly traded and liquid cryptocurrency’s global hyper-fungibility means this form of money could achieve greater velocity for global money supply by existing in a complementary dynamic with fiat (not in terms of transaction per second but daily USD-equivalent movement).

    Bitcoin makes global payroll much easier, global investments possible where they were not, it’s just that the relative yield of investing in anything else has been negative. The paradox is, you need a bear market to foment serious phase-shift growth in transactions, assuming the technical scale capacity is there for it which I am not sure is the case, but that’s another story.

    The killer app for sovereign blockchain money (describes for the most part the top 10 coins) is hedging the coins on-chain and having your unit-of-account stability on demand, globally, p2p, automated settlement. Then we won’t be having this debate, we’ll perhaps hear more sophisticated analysis of money-flow trends and where prices of the reserve coins would need to go to accomodate them.

  3. I love your passion for bitcoin and love that you’re working on tech to make payments easier. I believe that will certainly contribute immensely to the ecosystem.

    However, I think you’re missing a huge point – in the US, the government currently treats BTC as personal property (not as currency). This means you’re subject to short and long term capital gains tax each time you spend Bitcoin or any other cryptocurrency. This can be as much as 40%.

    Obviously, the US government has an enforcement problem ensuring taxes are paid and collected. But if you’re looking to follow the letter of the law, spending bitcoin is a poor tax choice.

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  7. Why would you spend bitcoin for anything other than regulatory arbitrage, porn, secret trips/purchases or dark market goods? It’s entire value model is censorship resistance.

  8. Good article and thats why Bitcoin Cash will win the race as they are targeting poor nations and smaller transaction at the start to get user base up while bitcoin segwit/lightning is going for rich wealthy holders in its claim to fame limiting expansion and useability.

  9. Chris, great article. I love seeing the position spelled out like this. I don’t agree with the thrust of your argument, but you are right in a number of cases. If you are already earmarking funds for consumption purposes, then it’s not dissaving to spend Bitcoin you recently acquired. As you know, there are folks in our community who do exactly this – or functionally identical (they spend Bitcoin and then immediately repurchase it on Coinbase or whatever).

    The reason I don’t ever spend Bitcoin (or other crypto) is because I want it to be successful. It’s true, by never spending, I am forgoing the possibility to positively grow its network effects. That’s not to be discounted. But what I think is more important is price action. By using Bitcoin, you are actually “selling” it. You are trading it away in exchange for some other item that has a cash price (so, analogously to your valid argument, you are selling your Bitcoin for cash every time you use it in commerce). If the person you are trading it to was going to buy Bitcoin anyway, then your trade with them prevents their marginal purchase from an exchange (or broker or BTM which hook up to exchanges anyway), which marginally affects the spot price of Bitcoin. By your trading it to them, you have negated the positive price action their purchase on an exchange would have created.

    Furthermore, most places you spend Bitcoin are not HODLers but regular merchants who don’t intend to hold the Bitcoin, but rather sell it immediately to an exchange through BitPay. So by using this currency (and creating some positive network effect growth), you are effectively selling it on an exchange indirectly which pushes down the purchase price.

    At this stage, I am more interested in effecting price action than growing network effects and therefore I remain a HOARDLer. I think this for a few reasons:

    1) My hoarding is personally enriching. By never spending crypto, I am maximally available to benefit from the occasional moontrip (self-interested, I know..). Your argument that only spending “consumption earmarked Bitcoins” and not saved Bitcoins isn’t exactly tenable: Bitcoins are Bitcoins. Why would I discriminate between them when they both have the same incredible future value? Why not save ALL Bitcoin I buy, regardless of whether it is earmarked or not? The important point, to me, is that the argument for saving any Bitcoin at all (that it will strongly appreciate) is the argument for saving all Bitcoin. When I am holding $100 of Bitcoin in my phone wallet wondering whether to spend it or not, I am not comforted by the notion that this was “consumption money anyway.” I am deliberating on the possibility of spending something that increased 10x last year and 10000x within 10 years. No amount of “I am saving enough anyway” will win that argument. Are you happy that beers you bought at Porcfest a few years ago cost you hundreds if not thousands of 2018 dollars? Looking back, if you spent hundreds of dollars on a single beer at Porcfest a few years ago, would you be okay with that? Or would you regard it as an enormous loss? Regardless, this is a personal motivation.

    2) The other motivation is community oriented. I hoard Bitcoin to help others because I want to increase the purchase price. My abstention from spending it effectively removes it from circulation, which creates deflationary effects and upward price movement. The (marginal) upward price movement I create generates interest in other people to speculate in it (by media pronouncements, and other ways), which brings more investing hands to the table, increases liquidity in the Bitcoin market and lowers price volatility. A Bitcoin with a higher price is a Bitcoin with lower volatility, because it can absorb greater transactions without moving the price. This type of stability is what generates interest in it as a global money. I think trying to force it to be a medium of exchange without making it a store of value/speculative asset first is putting the cart before the horse. People had to feel comfortable with gold as a store of value before they began using it for indirect exchange (if not, how could they bear the uncertainty that their shiny metal would be worthless before they could trade it away?).

    Eventually, there will come a time when a crypto (Bitcoin, BCH, Ether, whatever) will be so globally saturated and command such an enormous price that there really aren’t any speculative gains to be made anymore and it will therefore be so stable that it becomes a really attractive global money. Focusing on network effects and encouraging merchant action will be more important then. I don’t think we’re there yet, so I do what I can to withhold spending and make it as attractive as possible from an investment approach. I agree with Fred Wilson. 🙂

    My two bits

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