Bitcoin is More Than Just a Speculative Investment - #205
TL;DR - Don't fall for the trap of borrowing fiat to buy Bitcoin - it's not what it seems. Understand the true value of Bitcoin & why it's important for our future.
Dear reader,
Bitcoin is for everyone.
It can be used for saving, investing, and trading, but its core tenant is money and currency. And this is where the difference between currency and money comes into play.
The Difference between Currency and Money
Interestingly enough, most people are unaware of the different between currency and money. For a deeper dive, I would highly recommend Mike Maloney’s series “Hidden Secrets of Money” for a much more educational take on the topic. But to sum it up…
The properties of Currency
Medium of exchange. A medium of exchange is used to buy and sell goods and services.
Unit of Account. The currency unit is used to measure the value of different goods and services.
Portable. Currency should also be portable, which means that it is easy to carry around and can be used in different places.
Durable. It should be able to withstand wear and tear over time.
Divisible. Currency should also be divisible, which means that it can be broken down into smaller units.
Fungible. Meaning that it is interchangeable with other units of the same value.
These properties are essential for a currency to function effectively and be widely accepted by society.
Fiat Currency
Is all of the above only issued and controlled by a government. The currency is not backed by anything physical, like gold or silver. It use to be up until 1971. Now, the only thing which backs a fiat currency is people’s confidence in government’s ability to keep the currency stable.
The properties of Money
Contains all the properties of currency, with one more ingredient…
Store of Value. Money has the ability to hold its value over time, which means that it can be saved and used at a later date without losing its purchasing power. This is one of the most important properties of money, as it allows individuals and businesses to plan for the future and save for unexpected expenses. Money is often used as a store of value because it can be easily exchanged for goods and services, and its value remains stable over time. It allows people to have a sense of economic security and freedom.
Examples:
1 oz of Gold from 1971 will still be 1 oz of gold today.
1 BTC from 2009 will still be 1 BTC today.
1 US dollar from 1971 is worth pennies today.
Bitcoin is Money
Bitcoin, as a decentralized digital currency, is a form of money with all the properties listed above.
Borrowing For Bitcoin Is Not The Way
There's a flaw in the current mindset of borrowing fiat to buy Bitcoin. It may seem like a good idea and the math may check out, but it's not doing what people think it's doing. Borrowing money is essentially creating more fiat currency and showing that there's demand for it. And if there's demand, the makers of fiat will continue to fill it, prolonging fiat's life. It’s encouraging the practice of fractional reserve banking.
Understand Fractional Reserve Banking
Fractional reserve banking is a system where a percentage of deposits are held as reserves while the remaining is lent out. This stimulates economic growth but also poses a risk of bank runs and financial crisis. When central bank requires 0% of deposit reserves, banks can lend out all deposits but it also poses a risk of bank runs, financial crisis and hyperinflation as there are no reserves to fall back on. Banks would lend out more money than they can back it up which leads to a decrease in the value of money.
The mindset people have of borrowing fiat to buy Bitcoin is to gain more fiat. But this is not what Bitcoin is about.
Bitcoin is about using better currency, saving better money; an upgrade from the broken system we currently have. It's about giving people property rights that they have full control over. There is a need for good quality money, but the demand is lacking. Maybe this is more of a first world issue. People using the US dollar, the Pound, the Yen seem to be doing alright. But are we quick to forget the recent wave of cancel culture and government bank freezes? Unless you have cashflow each and every single month to satisfy the debt outside of your regular job, you will always be in the fiat mine.
The idea of borrowing, whether it's a personal loan or a home equity line of credit, may sound like a genius move. But unless you have another means of serving the monthly payments, you will have to continue to work the fiat mines longer than you anticipated. But won't the value of Bitcoin go up forever? The math says yes, but life says "maybe". While I'm bullish, I'm also a pragmatist. People borrowing to invest makes sense, but then are you pro-Bitcoin or are you pro-fiat? Nothing wrong with that, just be honest. Borrowing money to save in Bitcoin? Why would you borrow to save? Doesn't make sense.
Borrowing money means taking on debt, and incurring interest and other costs. Saving money, on the other hand, is the act of setting aside a portion of your income to be used later on. The act of borrowing money to save money means that you are essentially taking on debt in order to save money, which can be a counterproductive and costly process. It's better to save money on your own by cutting unnecessary expenses, creating a budget, and sticking to it. Borrowing money can make sense in certain situations, such as when you're investing in a business or a property that you expect to increase in value, but it's not recommended for saving money.
There are no certainties, only probabilities
While I do tend to side with people that the Bitcoin "price will go up and to the right," it's a high probability, not a certainty. Many things could happen between now and the end of the day, let alone life. Going all in for me wasn't just about "number go up." It was about survival. It was about making sure that I had a way to protect my ability to transact, to financially communicate value, while in unfriendly terrain. Going all in helped me make a certainty, that I could continue to carry on. But it meant abandoning a sinking ship (fiat) and onto a literal life raft for me.
There is no guaranteed certainty that Bitcoin will go on forever, that it’s value will always continue to grow; there is a probability of it doing so. Know the difference.
Conclusion
My aim for writing Living on Bitcoin is to not only provide guides and ideas for being able to use Bitcoin daily, but also show why it's important for us deeply consider why we're in this to begin with.
We must remember that Bitcoin is about using better currency, saving better money, and giving people property rights that they have full control over. It's not about borrowing money to gain more fiat.
Let's be honest with ourselves and understand our true motives for being a part of this revolutionary technology.
Until next time!