What is Bitcoin Time Preference?
There are some emerging ideas and theories being discussed currently around what could be termed Bitcoin time preference in regards to Bitcoiners’ mindset for investing in the cryptocurrency. To better understand, we need to briefly review some economic basics.
In economics, the inclination of a person to forgo current consumption (spend) in favor of delayed gratification (save) is called “Rate of Time Preference” – the extent to which people value current consumption over future consumption. If future income is expected to be higher than what it is now – a person is said to have a HIGH rate of time preference; whereas if future income is expected to be lower, a person is more inclined to save and is considered to have a LOW rate of time preference. Time preferences are critical to how a society functions because high time preference individuals do not think about the future. They spend now, are not very productive, do not save for tomorrow, and do not start businesses or build large-scale projects that require considerable planning. Thus, one can conclude that society will suffer if everyone has a high time preference.
In addition to saving or spending, “interest” is also a consideration – as some people place a higher value on immediate spending needs, others are content to earn compensation for not immediately spending. These people are the “lenders” – those who save. If there are many who save and lend, interest rates are low. If there are many less willing to save and lend – interest rates are higher. Our current monetary system seems out of balance in this regard, as loans are not given by those who’ve saved and wish to invest their surplus – but rather by banks with the ability to create money out of thin air. Interest rates defined by a central bank have no connection to the saving rate or “natural” interest rate of a free market. Artificially low-interest rates encourage investment in projects that would be deemed unviable if not for the misleading incentives investors are presented. This “cheap money” causes short-term booms, and over time unsound investments fail and booms turn into busts – recessions.
Since only what is saved by abstaining from short-term consumption leads to a sustainable buildup of capital – many feel the current monetary system based on debt and loans created from thin air will not lead to an accumulation of capital. Thus, many Bitcoiners care more about saving and they view Bitcoin as having a “sound” monetary policy – meaning they have a “bitcoin time preference” if you will.
Is Bitcoin “Sound Money”?
Sound money is money that maintains its purchasing power over time. Unsound currency continually goes down in purchasing power. As Ludwig von Mises wrote in his 1912 book The Theory of Money and Credit…
“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right. (…) the sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.”
Sound government requires the presence of sound money. Fiat money with no limits to supply and credit expansion spell disaster. Keynesian Economics follows the school of thought that by lowering interest rates a central bank can stimulate growth and employment. This directly conflicts with the Austrian School of Economics’ thought that monetary expansion and manipulation causes “boom and bust” cycles. Artificial money and credit supply-fueled growth is not sustainable and eventually leads to a recession. When faced with economic crisis, central banks trade growth and employment objectives to preserve the value of fiat money – compromising the very foundation of a free society.
Gold is considered “sound money” – a natural physical element that has served as tangible money in commerce for centuries. Does Bitcoin represent that same principle for digital commerce? The monetary base of bitcoins cannot be expanded, so it can be subject to deflation if widely used. If you believe that deflation results in the decreased price of goods and services causing the cost of production to decrease proportionally – thus effectively not affecting profits – then deflation encourages savings. Savings, in turn, lead to lower interest rates and increased incentive for entrepreneurs to invest in long-term projects.
To be “sound money” there are seven factors that must be present:
- Medium of Exchange – accepted at a standard value between parties for trade
- Unit of Account – a nominal monetary unit of measure to represent the value of goods and services
- Portable – easily transported across borders and easily stored
- Divisible – can be divided into smaller increments for exchange purposes
- Fungible – each money unit is the same as all other money units
- Durable – resistant to wear and tear, and handling in general
- Store of Value – hold its value over long periods of time
It is widely understood in the crypto-space that Bitcoin currently lacks in its durability and store of value. If the private keys are lost by a holder of Bitcoin, the coins are gone forever – and the price of Bitcoin is volatile. So the final score is 5 factors out of 7.
Gold is heavily regulated, governed by a market price set by traders twice a day, and the movement is limited across many borders. No retailers or merchants accept gold coins for goods and services, and it is not easily divided into small increments in today’s marketplace. Thus it does not meet the “divisibility” and “portability” factors any longer – and the final score is 5 out of 7.
There is arguably an 8th factor – sound money should have a predictable rate of supply, and a 9th factor – it should be secure. Bitcoin’s supply is strictly limited and there will only ever be 21 million bitcoins. Bitcoin is virtually impossible to counterfeit.
Before Bitcoin, gold provided the “anchoring” for fiat currencies and held inflation in check. Now the same principle of sound money that used precious metals to hold governments in check is the fundamental operating principle employed in the Bitcoin code. Since bitcoins are 100% decentralized and open source, they remain free from political influence or centralized control. Bitcoin is electronic cash not subject to the false authority of government, that will never lose its value due to inflation.
Bitcoiners do not envision a future where banks no longer exist and bitcoin is used for fast, cheap payments – but rather where payment solutions for existing currencies are transitioned over to Bitcoin. Credit cards, PayPal, other apps and innovations for digital payments across the world are backed up with bitcoin – and it takes gold’s place as the world’s reserve store of value. As the need for sound money and a solid store of value grows, Bitcoin is increasingly set to replace gold as a hedge against uncertainty.
Regardless of what the future holds, bitcoin holders are attracted to the principle of sound money and many can be said to have a bitcoin time preference – willing to forgo current consumption (spend) in favor of delayed gratification (save). Bitcoiners see a future where sound money returns, not the price that a coin fetches today. They see Bitcoin as holding the unique promise of being the soundest form of money humanity has ever seen.
Traditional Traits of Money
600BC – Now
c.1000 – Now
c.2009 – Now
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