So you heard about bitcoin, you’ve started to buy some, the price is rising, you’re all happy, and you want to cash out and run. You should; money is simply a means to an end, and if you feel that you can improve your life dramatically by spending that bitcoin, don’t let anyone stop you.
It’s your money; you do as you please, non shall interfere. That’s the great thing about permissionless, uncensorable money, and no one can tell you what to do with it or stop you from doing it, be it a good or bad decision.
The rest of the plebs and I will happily supply you with the exit liquidity to do so because we want more bitcoin and have not yet seen the need to spend our bitcoin or be tempted to spend it on what we might feel is a better deal at the time.
That’s the beauty of the collective saving within the bitcoin network, those that don’t need their savings right now continue to increase their position, while those who do can exit and use that wealth in the real world. Savings can be pulled out for any reason. Those that believe the bitcoin thesis realise that spending doesn’t materially impact your life; if that spending doesn’t generate a return or drive deflation further, it’s probably a bad buying decision.
I’m bringing saving back
I am a long-term holder; like many, I use bitcoin to save, not to spend, and I am often criticised for it, that I am pouring money into a black hole and I am going to die without spending my bitcoin. The fiat system has done a great job of demonising savings, and that idea is burned into the psyche of many a nocoiner.
I hear this critique all the time; what can you do with bitcoin? All you can do is hold it. It does nothing, so you might as well spend it. This frame of mind is high-time preference thinking and the failure to understand that the ability to save hasn’t been possible for decades.
The gross hyper-monetisation of real estate, stocks and even art should indicate that people are desperate to find stores of value because they want to save but don’t know how, so they pill into investments instead.
Investing has replaced saving because saving in fiat is a losing game, but bitcoin will make saving lucrative again.
The spend your bitcoin debate
When it comes to bitcoin, you’ll often see a debate raging on whether you should spend your bitcoin or not, but this is a completely personal choice.
On the holding side, you’ll hear arguments around bitcoins’ potential upside, and purchasing power increases you might miss.
While on the spending side, you’ll hear arguments about driving network adoption through commerce and providing capital to businesses willing to accept bitcoin to encourage them to keep it going and allow bitcoiners direct access to goods and services.
Both arguments have their merits.
While I do hodl, I freely admit, I’ve spent bitcoin, and I’ll continue to spend bitcoin when it is most efficient. In my case, it was far cheaper to use bitcoin for international transfers than fiat rails, so I preferred it.
The spending temptation
As bitcoin continues to rise in price, those satoshis you have stored away can start to buy you a little more, and I can understand why this becomes a temptation. You want to realise those sweet gains, and it will only get harder as you can afford more stuff. If you’re starting to feel the need to spend your bitcoin, I will encourage you to consider the following before you pull that capital out of cold storage or click the sell or spend button at any checkout point.
1. Do you subscribe to Gresham’s Law
Gresham’s law is not a law but an observation in economics that “bad money drives out good.” If there are two types of money, but one devalues faster than the other, the incentive is to spend the money which is losing value faster so you can realise that value before it’s diluted. As good money continues to hold value or increase in value, bad money will be spent faster and faster and tend to disappear from circulation.
If you subscribe to this idea, you wouldn’t want to spend your bitcoin as long as you have savings or cash flow in fiat currency. You would much rather focus on getting the most value out of your fiat reserves by spending it as soon as you can or when you need to spend rather than tapping into your bitcoin reserves.
2. Do you consider Metcalfe’s law?
Metcalfe’s law, also not a law but more of an observation, states that the value of a telecommunications network is proportional to the square of the number of connected users of the system. If you subscribe to this thesis, you would believe that we are still very early in the adoption cycle of bitcoin. As more people, businesses and countries adopt it, increase their position and trade in it, the value of the network increases, and so does the value of your proportional stake in the network.
If we consider that bitcoin is not even held by 1 billion users yet. Then we’re still pretty early in the adoption cycle and early on its price appreciation.
3. Will you spend and replace?
One strategy revolving in bitcoin circles is the concept of spend and replace. If you are in a situation where spending the bitcoin is the better option, such as an international settlement or a merchant offering you a discount when settling in bitcoin, there shouldn’t be a reason to pass up a good deal for an ideological stance.
In the spend and replace model, all you would do is spend the bitcoin required and then go into the market and trade an amount of fiat to secure that same amount of satoshis you spent. That way, you’ve acquired the deal or made the exchange but retained the same amount of bitcoin you had previously.
Some say that “spend and replace” have to be done on the same day to avoid volatility but you can also take some risk and set limit orders to try and secure cheaper satoshis if your order is filled.
4. Can you afford to recover your satoshi position?
If you think about bitcoin in fiat terms, you can probably skip this one since it wouldn’t matter to you. In fiat terms, you could have, let’s say, $10 000 in bitcoin, spend $1000, and the price could move up to the point where you have $10 000 once again. Now any real bitcoiner will tell you that’s simply a wealth effect and the $10 000 in purchasing power you have now is not the same, but if you’re still caught in a fiat mindset, you’re not going to care much.
As for those who do price their life and time in satoshis, this point might be more important to you. Depending on when you’re spending bitcoin, especially in the bear market cycles, you’re spending more satoshis than you would on a purchase in the bull market.
If you are going to spend your bitcoin, you might want to hold off and spend it during times of overconfidence so you can get the most for the least amount of satoshis, and once the market reverts, you can pick up the same amount of satoshis far cheaper. This means tracking and timing your exit and entry positions and is easier said than done.
5. Is the purchase worth more than any future appreciation?
Having your net worth increase in a short time can be an overwhelming experience; suddenly, things you could never afford previously are within your grasp. In times like this, the desire to spend your bitcoin might be at an all-time high, and you’ll have to consider the trade-off, do you get out now and secure certain items, or do you wait and secure them at a later date where you could spend less bitcoin and retain a bigger buffer.
This is ultimately a personal decision, and no one can make it for you. If you want the Lambo, get the Lambo!
6. Can you access other forms of capital instead?
Yes, bitcoin is your savings, your rainy day fund and when things get a little tight around the household, I don’t see why you shouldn’t dip into it to take pressure off yourself. Bitcoin could be that buffer that helps you cover expenses as you look for a new job or cover a major life expense.
But there are instances where you could resist the temptation to dip into that kitty.
If cash flow isn’t the issue and you have an income you can rely on, but the obligation size is a bit of a pain, perhaps looking at getting a loan from a traditional bank would be the better option. You could pay off the loan and retain your bitcoin position, so you have maximum exposure to the upside of bitcoin.
Alternatively, if traditional funding is too expensive or unavailable to you, you could secure your bitcoin as collateral and take out a loan against it. Once you’ve paid back the loan with your cash flow, you can unlock that bitcoin and move it back to cold storage.
7. What are the tax implications?
Spending $10 of bitcoin might not be a problem in most parts of the world, but every country has a different threshold on when they come after a piece of that pie. If you intend on spending your bitcoin, you’ll have to research what you can get away with tax-free in your country.
Depending on where you are in the world and what your government thinks of bitcoin, you will have a different tax burden to contend with should you realise that bitcoin gain. I would encourage you to seek tax advice from a local professional before you either sell for fiat or make a purchase that might trigger tax liabilities.
8. Do you want to conduct a private transaction
There are many reasons you’ll want to keep your identity separate from a transaction, and in all honesty, it’s no one’s business what you do with your money. If you see a green dildo on the chart and want to swap some sats for a real green dilly, go right ahead.
If you can’t use cash to maintain your privacy, you can opt for spending bitcoin directly or using gift vouchers instead, which you could purchase with bitcoin and help maintain your privacy. Now bitcoin payments are not private by default, and you must ensure that you’ve covered your tracks using coin control, a CoinJoin or other privacy methods.
Are you ready for the orange pill effect?
Spending your bitcoin can be tempting, especially during those greed-fueled bull markets, and while you might have one eye on that big-ticket purchase, you might want to take a step back and consider the options first.
Steady lads, when deploying that capital 🤣
Do you spend or save?
Now that you’ve heard my arguments on spending your bitcoin, which side of the fence do you sit on? If you’re new to bitcoin and have not spent your bitcoin, what is the reason? If you have spent your bitcoin in the past, what did you buy and did you love or regret your purchase?
Let us know in the comments down below. We’re always keen to hear from bitcoiners from around the world.
