In Defense of Bitcoin Hoarding


by Jeffrey Tucker, Foundation For Economic Education:

In Internet slang, they are called the HODLers, the people who are clinging to their Bitcoin and refusing to spend it. Instead, they just refresh their wallet apps, feeling richer by day while deferring consumption. Many of these burgeoning millionaires live like paupers. I’ve met many of them: all over the U.S., in Israel, in Brazil. They believe that every dollar they spend today is two dollars they won’t make in a few months. Probably they are right.

Bitcoin is undergoing a historic deflation, which simply means that its value is growing relative to the goods and services it can purchase. This is in contrast to inflation, in which the value of the currency falls relative to its purchasing power. Inflation inspires spending – better to get rid of the money while it is more valuable. Deflation inspires saving – better to keep it so that your wealth rises over time.

So there is nothing selfish, strange, or weird about holding an asset that is rising in value. It would be irrational to do otherwise. And there is nothing odd about spending like mad in an inflation either. Our expectations of the future determine what we do today in every life and especially in monetary economics.  

Some Money! 

This tendency to hold rather than spend is giving rise to a new claim. Bitcoin isn’t really a viable medium exchange, they say. You can’t buy a sandwich with it. Few people are paid in it. Adoption in the retail sector is slow. The total market capitalization is $219 billion and yet the trade volume nowhere near reflects that.

And it is true that most of the big money people are just holding it. James Mackintosh, writing in the Wall Street Journal, summarizes the conclusion: “It has become a vehicle for hoarding by libertarians for gambling by hordes of speculators attracted to its wild price swings.” 

I’m looking now at the total market capitalization of the entire sector of cryptoassets: it approaches $400 billion. That is larger than the market cap of JP Morgan, by the way. That valuation is in private hands, growing in value at incredible rates. It’s risen 1,000% in 2017, and many people are predicting much higher growth in 2018.

The Implications

Under old-style Keynesian theory, economic growth is driven by consumer spending, not saving, so anyone who is hoarding money under the mattress is holding back progress. Hoarders are the enemy. “Every such attempt to save more by reducing consumption will so affect incomes,” wrote J.M Keynes, “that the attempt necessarily defeats itself.” He popularized what became known as the “Paradox of Thrift.”

It’s supposed to be counterintuitive. You think that saving up for the future is a good thing. Whoops, you are hurting others and, in the long run, hurting yourself. You should be spending, even going into debt to spend.

The gold standard itself was destroyed in order to build a monetary system that could be inflationary.But sometimes “counterintuitive” is just wrong. That is the case here. There is no paradox. The intuition is right. Thrift is a good thing, on the individual level or for the whole society. Deferring consumption is the necessary precondition to permit saving. Saving is never wasteful. It’s true that infinite saving is pointless but that’s not how this works.

You are always saving for something. The end of saving is eventual consumption in some form. More importantly for economic growth, saving is the precondition for investment. Investment is what extends the complexity of the structure of production. This leads to employment, expansion of the division of labor, and the eventual rise of wealth.

 Consider the classic case of Crusoe on the island. Every day he is out catching fish to eat. He doesn’t have time to weave a net because he is always fishing with a pole. But at some point, he realizes that he could catch more with a net. In order to gain time, he has to stop fishing. So he saves up a few days of fish so he can eat without fishing, during which time he weaves a net. That net allows him to multiply his catch by 10 times. The deferring of today’s consumption for great overall wealth later is what makes progress possible.  

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