Bitcoin Haters Make the Best HODLERS
Few realize that it’s actually Bitcoin’s enemies who have the greatest incentive to acquire and hold the cryptocurrency indefinitely. Here’s why:
The Cypherpunks who labored for years to create Bitcoin did so for a particular reason—to undermine politically controlled fiat currencies issued by nation states and replace them with sound money that originates in voluntary human consensus and interaction. By limiting government’s control over money, and particularly over money supply—and providing the public with a voluntary, alternative currency ready for the digital age—the Cypherpunks hoped to end the the funding of wars and crony-capitalistic bailouts by governments via hidden inflation. Bitcoin’s explicit goal is to make fiat currencies mostly worthless, or at least worth far less than they are today.
Does Bitcoin stand any chance of succeeding in this regard? Well, whereas just a year ago it was reasonable for the establishment to largely ignore Bitcoin, that’s no longer true. Bitcoin is currently a Top 20 world currency by money supply, making it more significant than the currency of all but a very few the world’s nation-states. It’s rate of user adoption has trended on a consistent path for nearly a decade now, with the number of bitcoin users doubling about every 8 to 12 months during that time. While bitcoin usage is currently “only” at 1 percent of its potential market, that’s “just” 7 more doublings (only 4 to 7 years at historical trend) away from 100%! (1, 2, 4, 8, 16, 32, 64, 100).
If bitcoin continues on anything approaching its almost decade-long historical growth trend (which is really no different than the trend experienced by a number of other recent digital innovations), then Bitcoin will over the next decade do to money, banking, finance and nation-states (not to mention law and accounting) what digital film did to Eastman Kodak, digital music did to music stores, digital books did to book stores and the Internet did to newspapers.
While the odds of Bitcoin’s extreme success may yet seem remote, no rational person can still consider them to be zero. Said another way, the establishment now faces a non-zero (perhaps even non-trivial) chance of a “hyperbitcoinization” event—a period of a few years when the public adopts cryptocurrencies and abandons fiat currencies en masse (just as they previously embraced digital photos, music, books, news, etc. en masse), leading to incredible purchasing power gains in the former and painful purchasing power losses in the latter.
While hyperbitcoinization would be a boon to anyone holding bitcoins, and especially anyone acquiring them early (and anything short of ten percent adoption is still “early”), it would severely disrupt and perhaps even bankrupt those whose savings and reserves are held entirely in fiat currencies (like most individuals, banks, Central Banks, and even nation states today). Those fiat denominated reserves would experience a rapid decline in purchasing power at the same time that bitcoin’s purchasing power continued to soar.
The Establishment’s Dilemma
With Bitcoin’s odds of succeeding no longer zero, its establishment opponents find themselves in a very precarious position: They can either ignore the threat of this new technological innovation and just hope for the best (how did that work out for record stores, books stores, newspapers, Eastman Kodak, etc?), or they can hedge their risk of disruption by acquiring some bitcoins early “just in case”. By acquiring a little bitcoin sooner rather than later, they can ensure that at least some of their losses are offset by bitcoin’s gains in the event of hyperbitcoinization or something like it.
To illustrate, suppose you’re a corporation with $100 billion in dollar denominated assets. You currently estimate the odds of a hyperbitcoinization event in the next decade at “only” one half of one percent. But, if that unlikely event happens, your assets will decline in value precipitously (while the value of bitcoin skyrockets) and you’re likely to bankrupt as a result.
However, you can hedge this risk almost completely by holding just .5% of your corporate assets (a mere $500,000,000 of your 100 billion) in bitcoin today. You can hedge half the risk by allocating just .25 percent of your assets to bitcoin. You can hedge hedge a quarter of your risk by allocating only .125% of assets to bitcoin.
So...What do you do?
If you acquire bitcoin as a hedge and it crashes to zero, you’ve lost a tiny fraction of your assets. By contrast if you don’t acquire bitcoin and it skyrockets, you’ve lost everything. When the risk of loss is great and the cost of hedging is low, there’s only one rational option: You hedge.
Over the next 12 months, I’ll be very surprised if we don’t start to see large corporations, banks, pension funds and perhaps even central banks and nation states begin to hedge in this manner.
Hedging Leads to Higher Prices Which Leads to More Hedging
However, more hedgers means a higher bitcoin price. The new supply of bitcoin is strictly fixed. Bitcoins can’t be created any faster in order to satisfy growing public demand, both organic demand from proponents and hedging demand from detractors. With demand growing and new supply strictly fixed, prices must rise.
Hedgers Are the Most Committed HODLERS
Note that when bitcoin is acquired by its detractors as a hedge, they have very, very little motivation to ever sell. Unlike a trader or speculator who may be tempted to cash out and take profits the next time bitcoin doubles in price, the hedger’s concern over disruption grows with each price increase. The more valuable bitcoin becomes, the greater its odds of disruptive success and the greater the hedger’s need to hold on for dear life (HODL) or even to acquire more. Rising prices accelerate hedging/hoarding which drives prices yet higher.
In the end, the Cypherpunk’s greatest innovation may not be the technology of Bitcoin itself but rather the brilliant game theory incentives that ensure even its haters, especially its haters, acquire and hoard it or risk economic catastrophe.