Introduction: The Time Value of Bitcoin

Imagine a world where your savings account doubled every year, not just in value but in purchasing power. (Bitcoin’s current yearly rate of return is averaging 64%) This isn’t a pipe dream; it’s the reality that Bitcoin offers those who understand the concept of time preference.

Time preference, the inclination to prioritize present rewards over future ones, is a fundamental economic principle that underpins Bitcoin’s success. By understanding time preference, we can unlock the hidden potential of this revolutionary digital asset.

In this article, we will delve into the intricacies of time preference and explore how it directly influences Bitcoin’s value proposition. We will discuss the historical context of time preference, its role in shaping economic behavior, and its implications for the future of Bitcoin.

Understanding Time Preference

Time preference, in the simplest terms, is the human tendency to value immediate gratification over future rewards. It’s the reason we often opt for a smaller, immediate reward rather than a larger one that’s farther off. Think of it like choosing a piece of cake now over a healthier meal later. You want that piece of cake, but you know that summer is rolling around the corner and you want those six pack abs (or just a six-pack of Budweiser).

Historical Context: The concept of time preference has been explored by economists for centuries. One of the most influential figures in this field was Irving Fisher, who in his 1930 book “The Theory of Interest,” delved into the relationship between time preference and interest rates. Fisher argued that people are generally impatient and prefer present consumption over future consumption, leading to a positive interest rate.

Examples: To illustrate time preference, consider these everyday scenarios:

• Saving vs. Spending: When faced with the choice between saving money for retirement or enjoying a vacation now, many people opt for the immediate gratification of the vacation. Besides who wants to go on a beach vacation when they are 95 years old?
• Delayed Gratification: Children who can resist the temptation to eat a marshmallow immediately in order to receive two marshmallows later demonstrate a lower time preference.
• Investment Decisions: Investors often weigh the potential returns of an investment against the risk and the time it takes to see those returns. A higher time preference may lead to a preference for shorter-term, less risky investments.

The Role of Bitcoin in Time Preference: A Digital Asset for the Impatient

Bitcoin, as a digital asset with unique properties, has emerged as a compelling option for individuals with a lower time preference. Its characteristics align perfectly with the desires of those who value future rewards over immediate gratification.

Bitcoin’s Unique Value Proposition:

• Scarcity: Bitcoin’s supply is limited, ensuring that its value can appreciate over time as demand increases. This scarcity is a powerful incentive for individuals with a lower time preference, as it offers the potential for substantial long-term returns.
• Divisibility: Bitcoin can be divided into smaller units, making it highly flexible and accessible to investors of all sizes. This divisibility allows individuals to invest a portion of their savings in Bitcoin without compromising their liquidity.
• Transferability: Bitcoin can be easily transferred across borders, making it a valuable tool for individuals seeking to protect their wealth from inflation or political instability. This transferability can be particularly appealing to those with a lower time preference who are concerned about the long-term value of traditional currencies.

Time Preference and Bitcoin Adoption:

Individuals with a lower time preference are more likely to be early adopters of Bitcoin. They recognize the potential for significant long-term gains and are willing to invest in a digital asset that aligns with their financial goals. This early adoption has contributed to Bitcoin’s rapid growth and increasing acceptance as a legitimate store of value.

I believe Bitcoin’s rapid adoption has made it a more appealing investment option than traditional investing because of it’s potential. If you said to the average investor, your investment of $1000 will compound yearly in the S&P 500 at a rate of 10% a year on average, there isn’t much to get excited about. You’d end up with a whopping $1,100 at the end of that year.

But wait! There is more.

We’ve been experiencing a good amount of inflation lately. SO that $1,100 inflated a good 4-5% in terms of purchasing power of something you might want to buy like a house. Therefore, your investment really only got you ahead $50 after your purchasing power went down thanks to the Federal government inflating away the money supply (and it is WAY worse if you aren’t in the USA).

Therefore the investor much choose. I just earned this $1,000. I can spend it now on an all-inclusive weekend in Mexico, or receive $50 or so later.

If the investor considered Bitcoin, consider the following table.

Bitcoin Multi-Year Returns Compared

As you can see Bitcoin can have a dramatic effect on an individuals time preference. Even when it comes to selling your Bitcoin. Do you really want to sell the thing that is eating up the entire financial asset world (AKA Hyperbitcoinization)?

The Role of Miners:

Bitcoin miners play a crucial role in securing the network and creating new Bitcoin. Their actions are influenced by time preference, as they must weigh the costs of mining against the potential rewards. Miners with a lower time preference are more likely to invest in powerful mining hardware and continue to participate in the network, even during periods of market volatility.

We recently saw Marathon Holding ($MARA) announce they would be creating a treasury #bitcoin reserve. While a miner is a natural seller in the market as they pay for electricity costs, their belief in the utility of forces even these natural sellers to become time preference HODLERs.

The Implications of Time Preference for Bitcoin’s Future: A Long-Term Perspective

Bitcoin’s unique characteristics and the underlying principle of time preference suggest a promising future for the digital asset. As individuals increasingly recognize the value of long-term investments and the potential for significant returns, Bitcoin’s appeal is likely to grow.

The Potential for Exponential Growth:

• Scarcity and Increasing Demand: Bitcoin’s fixed supply and growing adoption can lead to a significant increase in its value over time. As more people recognize the benefits of owning Bitcoin as a store of value and a hedge against inflation, demand is likely to outpace supply, driving up prices.
• Network Effects: Bitcoin’s value can be amplified by network effects. As more businesses and individuals adopt Bitcoin, its utility and acceptance increase, further driving demand and price appreciation. As we believe Bitocin is the best money and see the results, others will inevitably follow. Especially when you are sitting on the beach vacation with a moijto and your buddy is thinking about saving those $50.

Challenges and Risks:

• Regulatory Uncertainty: The regulatory landscape for cryptocurrencies can be uncertain, with governments and financial regulators taking different approaches. Changes in regulations can impact Bitcoin’s price and adoption.
• Market Volatility: Bitcoin’s price can be highly volatile, with significant fluctuations occurring over short periods. This volatility can be challenging for investors with a shorter time horizon, but it can also present opportunities for those with a long-term perspective.
• Technological Risks: The Bitcoin network is constantly evolving, and there is always a risk of technical challenges or security breaches. These risks can impact Bitcoin’s price and reputation.

The Long-Term Outlook:

Despite the challenges and risks, the long-term outlook for Bitcoin remains positive. The underlying principles of time preference and scarcity suggest that Bitcoin’s value is likely to continue to appreciate over time. As individuals and institutions increasingly recognize the benefits of this digital asset, its adoption and acceptance are expected to grow, solidifying its position as a valuable store of value and a potential hedge against inflation.

Would you like to discuss any specific aspects of Bitcoin’s long-term potential or the challenges it faces?

Please read our disclaimer here regarding investment advice and risk. Disclaimer: This should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. Please consult an appropriate tax or financial professional to understand your personal tax and financial circumstances. I may get compensated by some platforms mentioned below (because of referral links). Do your own research.

References:

• Saifedean Ammous: The Bitcoin Standard
• Vijay Boyapati: The Bull Case for Bitcoin
• Plan B: https://twitter.com/100trillionUSD
• Nakamoto, Satoshi. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System.
• Lee, J., & Lee, Y. (2017). Understanding Bitcoin: A Technical Analysis. Apress.
• Fisher, Irving. (1930). The Theory of Interest. Macmillan.