💳 Spending Bitcoin
FIRE BTC Issue #6 - The opportunity cost fallacy of spending bitcoin vs dollars
“Never spend your bitcoin!”
This is a popular refrain in the bitcoin world. Why would you ever spend your bitcoin, which is engineered to gain value, when you could spend your dollars, which are engineered to lose value?
On the surface, this is a perfectly reasonable argument. Haven’t you heard the story of Laszlo Hanyecz, who famously spent 10,000 BTC on 2 pizzas! 😱 That would be worth $700,000,000 today!
The concept of opportunity cost is commonly referenced when people talk about spending bitcoin, but I’m here to tell you it’s being misapplied.
🍕 Laszlo’s pizza
In May 2010, bitcoin had been up and running for over a year. The network had grown, but it was still very small. Its participants still treated the system as an experiment and bitcoin’s monetary units as worthless.
That all changed when a Bitcoin Talk forum member with the handle laszlo put out a proposition.
Now before you start thinking just how stupid was to spend the GDP of a small country on a couple of pizzas, keep in mind that hindsight is 20/20.
It was hard to imagine just how valuable bitcoin would become just 15 years later. And bitcoin is money, after all, so someone had to be the first to make a trade and establish a price.
The story of Laszlo’s pizza is an extreme example of an opportunity cost fallacy that is common in the bitcoin community.
The fallacy goes something like this: “Don’t spend your bitcoin, because some day it will be worth $1 million. Spend your dollars instead, because they will lose value over time.”
Sounds plausible, right?
This perspective parallels a particular economic concept called Gresham’s Law.
📜 Gresham’s Law
“Bad money drives out good.” That’s Gresham’s Law in a nutshell.
When two competing monies in an economy are given the same nominal value, the one with the lower commodity value will be spent, and the other will be saved. Thereby the bad money drives the good money out of circulation.
While not a perfect analogy for “never spend your bitcoin”, Gresham’s Law illustrates the mentality in a similar way.
Of course, bitcoin is the “good” money, and dollars are the “bad” money. So it stands to reason that you should spend the bad money and hoard the good.
True enough, but this misses the point.
🤑 The true opportunity cost
Instead of focusing on the medium being used for your spending, you should instead focus on the spending itself.
Issue #2 of FIRE BTC, FIRE Fundamentals, highlights the importance of intentional spending. As FIRE practitioners, we want to ensure that all of our expenses are either necessary or worthwhile to make our lives better. Anything outside of those categories is wasteful and should be eliminated.
Because our goal is to stack assets quickly to reach financial independence early, every expense is a lost opportunity for increased savings. It cuts two ways at once:
Money spent could have otherwise been saved, which gets you that much closer to your FIRE stacking goal.
Your FIRE stacking goal is a bit higher with each expense you add, to the tune of 25x if you use the 4% rule.
Notice none of these points are related to whether you’re spending bitcoin or dollars. A $100 expense creates an opportunity cost of that amount regardless of the medium used.
Let’s say for this expense you have $100 in cash and the equivalent amount in BTC. Using bitcoin to pay the expense does decrease the stack you have in the moment, which changes the asset mix you own momentarily. But that can be easily corrected by replacing the BTC spent through a purchase with the $100 cash not spent.
“Spend and replace” achieves the same end result as just spending the cash. In other words, the spending itself creates the opportunity cost, regardless of which monetary medium you spend.
To illustrate this point simply, I’m ignoring potential transaction costs and friction in the spend and replace method. This is not to say they shouldn’t be considered, but there is a different kind of opportunity cost in holding higher dollar balances to remove them. After all, bitcoin has a very strong CAGR, something I covered in issue #3, The Power of Compounding. That being true, the transaction costs from spend and replace may be more than offset by the gains received by holding a higher BTC balance.
But that’s a topic for another day.
That’s it for this week. Thanks for reading!
💡 Enjoyed this content? Share FIRE BTC with someone who’d love to learn about financial independence and bitcoin!
Until next week,
Trey ✌️
P.S. With Donald Trump winning the White House and a potential Congressional sweep looking likely, bitcoin looks primed to enjoy a tailwind from the political environment.
Trump committed to build a strategic bitcoin reserve for the country and to #FreeRossDayOne. Let’s see if he follows through.
It might make sense just to get some in case it catches on.
- Satoshi Nakamoto, January 17, 2009
I’m dumb but I am having a hard time understanding what you are getting at with this one. Are you suggesting that we should be spending bitcoin for some reason? You laid the groundwork for making a point, but I missed it lol are you saying we should try to spend bitcoin as often as possible and replace it by buying more and then holding only bitcoin and as little fiat out as possible?