Sovereignty through mathematics CHAPTER SEVEN26th May 2019
CHAPTER SEVEN — 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 of 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 lend and spend as much as we can. We’re bombarded with ads for micro-loans, mortgages and financial services on a daily basis. Why? Because of the very nature of money and our inability to understand its mechanics. Inflation is the underlying force that makes us squander rather than save. It hinders us from reaping the fruit of our labour whenever we so think 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 labour not only through space but also, through time.
The Stanford Marshmallow Experiments was a series of studies on delayed gratification conducted in the late 60’s and early 70’s. In the 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 have found that the kids that were able to resist the temptation of the first cookie tended to score better at SAT tests, have lower BMIs and higher incomes than their less disciplined counterparts. Investing in your future self, in other words being resistant to the temptations of the present in favor of a delayed gratification, is the most effective skill a person can develop in order to ensure himself a brighter future. You reap what you sow and investing in yourself today is the best thing you can do for your future self. This is also known as having a low time preference. Having a low time preference is a very important 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 a net when on a deserted island, might make you hungry during those sacrificed days, but such an action will provide you with much better chances of catching more fish in the future. Likewise, an education now might lead to a higher salary in the future. Unfortunately, our current monetary system distorts our perception of time preference and favors those with a higher one. Those that spend rather than save. We’re at a different point in history than the abovementioned 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 how to find better ways of supporting his loved ones and he will succumb to whatever narrative you fill his head with in order to make him work for you instead of himself through taxes and inflation”.
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 after a user named Gamekyuubi posted “I AM HODLING” on the BitCoinTalk forum. The misspelled post became one of the community’s most prominent memes and it is still widely used as an acronym for Hold On for Dear Life, and a battle cry for fellow Bitcoiners to resist the urge to sell during bear markets. Users who have decided to never sell all, or at least the lion’s share of their bitcoins, 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 the HODLers of last resort. Considering the limited supply, all Bitcoin needs to keep its price rising 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 of a bitcoin has ten folded roughly every three years since its inception, through bull and bear market cycles. The best guarantee we have that it will keep on doing this, is the limited supply in conjunction 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 of bitcoin in one way or another. While there might be some truth to be found in some of these theories, the most basic function of a deflationary asset is lost and almost never mentioned. The elephant in the room so to speak. The best use case for a commodity that is as scarce as bitcoin is not to spend it, or even to trade it. It is to hoard, save and hold it, for as long as you can. By doing this you increase the stock and you limit the flow of the asset. The more people that do this, the harder a bitcoin becomes 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 portable as bitcoin. It’s unique history, and resistance to change, has 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. So what if every person in the network becomes a HODLer and decides to never sell? Wouldn’t the network just slowly come to a halt? Not at all. Everyone has a price. No one would not sell their bitcoin if it would buy them a small city. The risk of losing your keys stays the same regardless of how much wealth you store in bitcoin. At some point in time, when the price is high enough, acquiring a couple of additional baskets for your financial eggs will be a wise thing to do. Bitcoins are also very divisible. The smallest unit, a Satoshi, is a hundred millionth of a bitcoin. With the introduction of the Lightning Network, even smaller units than that are made possible, albeit not in the actual Bitcoin blockchain. This makes them highly saleable, even at astronomical price levels.
What not having sound money has done to us humans, 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 taken away that we don’t even realize how big a part of their day they spend working for someone else. Wars are funded by inflation. Try to imagine how many man-hours that were put in by people that didn’t realize that what they were actually working for was a war machine because of their corrupt currency. Every time you use a fiat currency you legitimize counterfeiting. Every time you use bitcoin you promote sound money. Infact, every time you don’t use your bitcoin but save them 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, guess why so many of us are so excited that we put are careers at risk for this technology? Once you realize what Bitcoin is and what it will do to the world, there’s no way of un-realizing it. It really is mind-blowing.
In 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 as rapidly as it did, a small group of early investors became really rich really fast which in turn spawned a media hype around the phenomenon. Mainstream media mostly denied Bitcoin any legitimacy and portrayed it as a pyramid scheme, a tulip craze or a bubble at best. Most journalists simply couldn’t grasp that an asset seemingly made out of thin air could have any long term relevance. Some of them 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 nothing to world dominance in a decade, people always try to find the next big thing. In Bitcoin, this attracted a lot of scammers which the misleading plural form of the word cryptocurrency is a proof of. The snake-oil vendors of the altcoin world often claim that their products are technically superior, faster or more privacy focused than their predecessor. They’re telling you everything but the crucial underlying fact that they’re not decentralized and therefore not immutable, 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 retailers got bamboozled by the buzzword frenzy and invested a lot of money in these quack-tokens. In doing so, they created a lot of confusion in the market as many altcoins increased in price at a higher rate than Bitcoin did during the bull runs. As almost everyone on earth lacks an understanding of basic monetary economics, the bubble got bigger and bigger until it inevitably popped and wiped out most of these useless alternative currencies. Bitcoin followed the ups and downs but stayed less volatile than its “competitors”. As the rest of the cryptocurrency market crashed, bitcoin managed to bounce back upward from around the same levels as it had in the beginning of the bull run, just as it has been doing 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.
A lot of things point toward an even more extreme bull market next time around. The Fear Of Missing Out, or FOMO, from all those who got wrecked by the alt- and fork-coin boom of 2017 will be one factor. Hyperinflating fiat currencies will be another. Every time the people of Venezuela, Turkey, Argentina or Zimbabwe gets screwed over by their respective central banking authorities, the world as a whole becomes a little more aware of Bitcoin and its potential as the only means of storing wealth that these people have. In comparison to the Venezuelan Bolivar there was no crash in bitcoin at all. There’s also a higher chance that the really big players will hop on to the next bull train. This comes with a massive snowball-potential as bitcoin today still constitutes but a very small portion of the bigger investor’s average portfolio. Not to mention what will happen when institutional investors or even nation states 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 and add even more snow to the oncoming wrecking ball.
It is still unclear when this will all play out. Maybe during the next bull run, probably not, but maybe. 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 payments in bitcoin as its ability to store value becomes more and more of a proven fact than a theory. 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 an inflation rate of approximately 1.8% which is lower than the US Federal Reserve’s target 2% 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 labour and transporting 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 case of a political collapse. Bitcoin provides us with the ability to store any amount in our heads and pass it down through generations without anyone ever knowing we even had it in the first place. It is effectively providing everyone with the power the kings of feudal societies had to turn people into knights. Any Bitcoiner can now dub any nocoiner into a fully fledged time-proof Bitcoiner.
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Sovereignty through mathematics CHAPTER SEVEN was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.