Making sense out of the Bitcoin “hodling” phenomenon
Crypto experts advise investors to hoard, rather than to spend their bitcoins. It’s a reverse of Keynesian economics that glorified spending and that led to the stagflation of the 1970s and the global financial crisis, among other disasters.
Ben Franklin may have told us “Rather go to bed without dinner than to rise in debt”, but Keynesian economics overturned that wisdom in the early 1930s. Times were bad, few people were spending. Milton Keynes blamed hoarders for holding back the economy.
In his seminal “The General Theory of Employment, Interest and Money”, Keynes popularized the Paradox of Thrift, where “Every such attempt to save more by reducing consumption will so affect incomes,” he wrote, “that the attempt necessarily defeats itself.”
In other words, Keynes said that it is the folk who stash their money under the floorboards who stunt the economy by stifling demand and harming someone else’s income. It is only by spending that the economy roars forward, because one person’s consumption is another person’s income.
This Paradox of Thrift is supposed to be counter-intuitive. Keynes, even, argued that people should go into debt to become rich.
Well, we’ve seen the results…
President Nixon destroyed the gold standard in the 1970s to build a monetary system that would be inflationary. In that way, your dollars could buy more bottles of coke than they would tomorrow, so you’d raid the stores. Gold was confiscated from people. To incentivize people to spend, the government spent likewise to goose the economy.
The whole thing exploded in the stagflation of the 1970s, and, again, in the 1980s, with Gekko’s “Greed is Good” motto. In these and other minor recessions, currency speculators, greedy businessmen and corrupt union leaders pushed US economics to its knees. Then came the 2008 economic crisis, also known as the global financial crisis – the worst economic disaster since the Great Depression.
Small wonder that at the height of all this mess, popped up unknown Satoshi Nakamoto, who published a white paper on a cryptography mailing list, titled “Bitcoin: A Peer-to-Peer Electronic Cash System“.
The paper called for a deflationary coin.
While inflation sees the price of goods rise while the value of the coin diminishes, deflation is the reverse. The coin increases in value, so you can buy exponentially more goods with it as time passes.
How can your currency increase with value? How can you get more for your buck?
So Bitcoin adopts the vocabulary of mining. You mine for coins, you hoard (or “hodle”), you have to show Proof-of-work (PoW) or Proof-of-Stake (PoS), coins are gold, there is a limit on the amount that can be created, and so forth.
It’s a return to a pre-Keynesian, Benjamin Franklin day.
Keynes Paradox of Thrift turned into Bitcoin’s Virtue of Thrift.
Small wonder, too, that it was India’s demonetization debacle of 2016 that lugged as many as 2,500 Indians to Bitcoin, according to a May 17 article in India’s Economic Times.
November, 8, 2016, the Reserve Bank of India (RBI) removed 500 and 1000 Rupee notes from circulation, ripping India of 86% of its national currency. 1.3 billion people lost all their savings, as a result. People lined roads to buy groceries and other items and were turned away because these items were no longer available. The stock market fell by seven percent. More than 82 people killed themselves or others, while hundreds more were trampled when they tried to grab food. This crisis highlighted the insecurity of money and drove between twenty to thirty percent of India’s population to Bitcoin. By the end of 2016, more than 600,000 Indians used Bitcoin, according to several bitcoin outlets, while Bitcoin revenue jumped 25% from October to November.
Bitcoin attracted people in India, since it offered a more secure system for their money than their banks offered them.
Returning to Bitcoin value, a recent Coin Telegraph article noted that the cryptocurrency beats General Electric, once the largest company in the world, by 30 billion and looks ready to threaten major reserves, like the gold reserve. Bitcoin market capitalization climbed to 160 billion at the beginning of December. And it continues to climb because – according to the laws of supply and demand – as supply diminishes, more people want that coin and are prepared to pay for it. Scarcity hikes cost.
By 2140 – another 122 years – Bitcoin will mine its last production that’s capped at 21 million coins. By January, 2018, eighty percent of all 21 million BTC will be mined and brought into circulation. That leaves only 4.2 million coins, or 20% of the total BTC trove, for the bitcoin haves and for the bitcoin have-nots to grab. In 2140, there will be almost nine billion people. Only a few of those will have bitcoins. The more bitcoins you have, the richer you are.
That’s especially the credo for those who believe that bitcoin is the future. The only future. That it will replace fiat money as we know it.
So, if you want to make it in the annals of bitcoin wealth and become one of those few insanely rich people, you’d follow Roger Vers, celebrated bitcoin Entrepreneur, who tweeted that “hoarders are more important than spenders.”
Of course, there’s the flip side of the coin: if you hoard rather than spend, doesn’t this undermine crypto’s value as cash? So what value would your hard have at the end of the day?
So the debate goes round and round…
Anyway, that’s why Bitcoiners hoard.