Bitcoin And Time Preference
THE BITCOIN ESSAYS
Originally Published March 2023
5 Minute Read
There’s an old story about two fish. Swimming side by side, one fish says to the other, “The water sure is warm today.” The other fish responds, “What is water?”
It’s strange to think of money in this context, but consider, rich or poor, human beings are swimming in money. We speak the money language every day and most of the time we aren’t even conscious of it. The language of money is a potent precondition of human life and for most periods in human history there is no reason to question whether this language may change. Other Essays explore the various implications of the changing money protocol in the information age. For our purposes here, we will investigate how monetary incentives affect our time preference and in particular, what these implications will be in a world running on Bitcoin.
The idea and discussion of time preference takes particular precedent in the discipline of theoretical economics investigated by the Austrian economists of the 20th century. Time preference refers to how monetary incentives drive consumption closer to the present, or encourage one to delay consumption to a later date; in the case of Bitcoin, a higher block.
One thing to understand about time preference is that these incentives, akin to natural processes and forces, are always acting. There is never a time in life when preference for consumption is not being directed one way or another. One may freely determine to act against incentives at any given point, but the incentives remain and are perpetual, whether consciously or unconsciously observed. The playing field is always in flux. A life of modern comfort may have low time preference for primal needs of food, shelter, and water. But drop a person out of a plane with Bear Grylls and within hours one will find their time preference for these basic needs is vastly heightened.
Some may be discomforted by the fact that money is a basic human need, but the fact remains. This universal tool is used as a call option in nearly all instances to obtain the resources one consumes to not only survive but actualize on the higher tiers of Maslow’s hierarchy.
The use of the money tool cannot be decoupled from the incentives imbued in the the tool itself. Considering money as a tokenized unit of energy on top of the asset hierarchy, this energy is being amplified or diluted at all times. Stretching the time frame out over years and decades is where the undeniable incentivisation is discovered. Of particular interest to those studying Bitcoin is the infamous charts highlighted on ‘WTF Happened In 1971’ which appears to show uncanny inflections in numerous socioeconomic charts precisely in the year our modern society walked away from the gold standard.
Stepping back even further, even the lay observer notes the dollar and other fiat currencies are on a seemingly never-ending march toward zero. Throughout history these monies eventually fail and are replaced by a “new” system which are typically just other manifestations of the same. In a sense, these systems all fail because they are destined to fail from their inception. Similar to a new pool constructed with a small leak in the liner, over time the leak will widen and ultimately the structure will fail. In other words, humans have never had perfect, immortal money. There is always a fault in our stars, as it were.
So then what are the implications of these defective money protocols, or languages, on the time preference of its users? In short, consume now! Or at least, consume sooner. Why? For today we may eat and drink, tomorrow we die. This is the underlying incentive of a dying money, bring your consumption forward. Conversely, what would be the time preference incentive for a money which perfectly holds its tokenized energy? Or better, amplifies energy. i.e. the immortal pool liner that never leaks. In this case, one is incentivized to delay consumption as long as possible. Hard core saving. Why? Because compounding is the eighth wonder of the world, and one who understands this and acts prudently in the world will find their odds of ascending the socio-economic dominance hierarchy is much improved.
These implications for the consumer and the saver also apply to the producer. In a world of dying money, the products and services these monies call upon also die a slow wheezing death. Various studies have shown in particular that goods for which prices are sticky; the 99 cent chocolate bar for example, devolve in size and quality as the money dies. This obviously due to the fact that if the price remains sticky, but the purchasing power of the monetary unit is declining, the same unit can only call upon less goods in the future. This perpetual death incentivizes producers to craft inferior goods over time. This process is not always obvious as the potent force of technological deflation is also acting and obscures the time theft taking place under the surface. You don’t know, until you know.
What then are the incentives for producers operating under a hard money protocol for which purchasing power is increasing over time? You guessed it. Again, the opposite! In this instance, producers are incentivized to produce higher quality goods for the same unit of money because the purchasing power for said unit is increasing over time. Experientially this may be observed over a period of say, 10 years, as a noticeably improved chocolate bar. Over much longer time scales there is a strange correlation between hard money protocols and human projects spanning multiple generations. In our modern fiat world, we visit these projects and seldom build them.
Concluding our discussion of time preference and the inescapable influence our money protocols have upon them. We have covered how devaluing money inherently incentivizes ones time preference to be high, whereas an appreciating money incentivizes ones time preference to be low. In a Bitcoin world, there will only ever be 21 million units. The money is perfectly, finitely scarce. Assuming trends continue, and the thesis plays out as predicted, the purchasing power of a Bitcoin goes to infinity as time goes to infinity. In other words, immortal money. What are the implications in terms of time preference for those who wield this money tool? I’ll leave you here to daydream.
This is Jonathan David Kellogg – Writing for
That Bitcoin Blog.
These are The Bitcoin Essays.
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