Inflation Is An Insurance Premium Against illiquid Markets

Inflation is an insurance premium

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Bitcoin has given us a new way to store the product of our labour and gamified savings to an extent, a past time that has long since become futile under the fiat regime. As a working pleb, each of us only has a few decades of earning potential based on our labour and time. It is finite and how we squander it under a fiat standard is a greek tragedy.

If money is representative of your efforts, your skill, your time and your energy, then under a fiat system, you’re actively being siphoned from with no way to stop it, only to stem the bleeding. You can actively see how this energy drain has made us lethargic and discontent, and without temporary sugar rushes from government and central banking, the walking dead, or should I say “working dead”, continue to meander on, and we call it the modern economy.

People are angry; they are disillusioned and confused; what did they do wrong? Why, no matter how hard I work, do I not seem to reap much fruit for my labour, and why does the fruit I do reap get smaller and smaller? It’s enough to drive anyone mad or run straight for the closest cliff.

I know I’ve felt that way; the fact that I couldn’t get ahead simply by working remained a splinter in my mind, which led me to bitcoin, and I am grateful for it.

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At last, I found bitcoin

Your transition toward bitcoin

Now that we know the dangers of fiat and we have a tool to protect ourselves from the uncertainty of this fragile system, how we migrate has become a topic I’ve been thinking about a lot lately. I’ve been having debates with myself and my fellow bitcoiners on what they think of a cash position as it pertains to their savings.

I think we can all agree cash is trash as a long-term store of value, regardless of the fiat currency you’re holding. But there is very little we can do about that; that’s why we have bitcoin. Also, most of us who look to acquire bitcoin do so by trading cash for bitcoin on centralised exchanges or via P2P trades.

Like it or not, cash is a big part of the bitcoin ecosystem, so how we handle our cash position when it comes to bitcoin is 50% of every decision. Cash is how we get paid, cash is how we pay others, and cash is how we denominate our assets and liabilities.

Despite its obvious flaws, cash is widely accepted, deeply liquid and widely available, and those merits are often undervalued by bitcoiners.

Cash is a melting ice cube

“We really felt we were on a $500M melting ice cube, Once the real yield on our treasury got to more than negative 10%, we realized that everything we are doing on P&L is irrelevant.”

Micheal Saylor – MicroStrategy (NASDAQ:MSTR) CEO

Get off zero

The first type of stacker is the pre-coiner or newcoiner; we’ve all been there; when bitcoin is sub 1% or 1% of your net worth, you’re still figuring it out, or you’re not ready to commit, and that’s perfectly fine. Your cash position may be quite large compared to your bitcoin position, but I often see it as an hourglass.

It’s only a matter of time before more fiat drips into the bitcoin side of the jar.

  • Either through the fact that bitcoin continues to appreciate and you want to gain more exposure to it, as your cash continues to underperform.
  • Or it could be due to your growing conviction regardless of the price, and you are becoming more comfortable with bitcoin the network and bitcoin the asset and would like a larger share of the network.

The one downside to me of the get-off zero crowds tend to be infrequent buyers; they’ll buy at certain times and don’t fully channel the volatility of bitcoin to their advantage. The other negative of the get-off-zero strategy is you expose a larger size of cash to debasement the longer you leave it in fiat.

Get on zero

Then we get the other side of the trade, the get-on-zero crowd; these bitcoiners want to hear nothing about fiat, they don’t want to touch it, they’ve already got 90 – 100% of their net worth in bitcoin, and they’re not going back. They may keep a small cash position to service fiat liabilities, or it could be that fiat rises from zero each month as they earn a salary, but you can be sure anything they don’t need gets smash bought into bitcoin.

These bitcoin holders will either keep enough fiat to match their bills and certain purchases, use debt to finance their lives and only pay it back with the fiat they earn, or they’ll liquidate bitcoin strategically to cover their expenses.

In this moment, I think that getting on zero carries more risk than I would like for myself. I do not want to have to sell my bitcoin if I made a miscalculation on my fiat obligations or I am met with the need to use fiat I don’t have on hand. Depending on the time I would need to sell, it could put a serious dent in my ability to stack for the future if you’re liquidating in a bear market.

You not only leave yourself exposed to uncertainty in your fiat obligations, but you can find yourself on the wrong side of volatility in the bitcoin market.

Dollar-cost averaging

Still proven undefeated is the dollar cost average crowd; these soldiers show up daily dripping amounts of fiat into the market daily. They are not here to move the price. They are only here to provide a floor for the day, take their piece of the pie and safely store it away long term.

Since the inception of bitcoin to fiat markets, those who chose to dollar cost average into bitcoin and hold it for any 4-year period or more outperformed any other investment strategy. Yes, this is in hindsight, and it doesn’t mean the trend will continue, but there is very little sign that bitcoin’s demand won’t continue to rise.

As new market participants still try to figure out what bitcoin is, what it should be worth, dabble in altcoins or stubbornly avoid bitcoin, the dollar cost average crowd slowly chip away at the supply, draining markets that need to be resupplied by miners, miners who are getting lower stock allowances each halving.

The dollar cost average strategy requires you to have cash on hand; since you’re auto buying, you can scale your daily purchases up or down as you see what can be made available for savings and gives you more control over how you expose yourself to bitcoin volatility.

Having dry powder

The concept of holding cash in reserve for bitcoin purchases or in case of fiat liabilities is, to me, still an important one, I never know when I’ll need a bit of cash for an emergency, and I don’t want to risk liquidating my bitcoin at an inopportune time to get liquid. Having dry powder protects me against that downside.

Another reason cash holdings can come in handy is the fact that bitcoin is volatile, and as new market participants come in, they are all trying to figure out how to price it. Bitcoin will retrace from time to time, and if you have cash on hand, you can dive in and scoop up those satoshis when there is a deleveraging event or a negative media cycle.

Perhaps your cash position is taking an 8% knock due to inflation. It won’t be so bad if you’re able to deploy 20% of your cash into a market where bitcoin falls 65%. If you believe bitcoin will return to that value, you’re already offsetting your inflation loss for that year and even the inflation loss for years to come.

For those reasons, I feel the inflation rate you’re getting hit with to store some of your purchasing power in fiat currency is worth it. Yes, you’re accepting a devaluation, and I know it’s not a nice feeling once you recognise it for what it is, but think of it as an insurance premium.

You’re not going to get the premiums back, but you do have that kitty to deploy to protect yourself, protect your bitcoin holdings or acquire bitcoin during market corrections. A pretty decent insurance policy even as the premiums are increasing.

If this does sound appealing to you, the question you need to ask yourself would be, what should your cash allocation be? And I leave that up to you to decide. You can always play it lose and rebalance as you see fit. There is no right or wrong answer. There is only adapting the way you save to the current market conditions with the information you have in front of you.

How do you treat your cash?

In the end, the strategy you pick is all about your personal time preference, the income you make, the expenses and personal inflation you experience and, of course, the goals you have yourself. Stacking bitcoin like any savings is a uniquely personal journey, and no two people are the same.

So don’t feel pressured by one strategy simply because your peers are using it. It’s important not to over-extend yourself; that’s how you undo a lot of the good work and foundation you’ve laid by being prudent. Patience is rewarded in bitcoin so go at your own pace; this is a marathon, not a sprint.

Forget the charts, the price, the models, the news, the influencers; worry about yourself instead.

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To each their own, but my your stack be plentiful

What is your satoshi stacking strategy?

So what do you think about your cash position? Is it the melting ice cube you’re eager to get rid of as soon as possible, or are you taking your time to build a position in the bitcoin ecosystem? Which one of the strategies above do you employ? Why have you decided to opt for that strategy?

Let us know in the comments below; we’re always keen to hear from our fellow stackers.

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice. It is for educational and entertainment purposes only. As of the time posting, the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency, as all investments contain risk. All opinions expressed in these articles are my own and are in no way a reflection of the opinions of The Bitcoin Manual

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