By Adam Simecka
Should you spend the bitcoin you have worked so hard to acquire? I believe there is an argument to be made on both sides of this topic, and I want to do my best to consolidate my thoughts on it. Given all perspectives and evidence, I think it is not only possible but imperative, to spend bitcoin as much as possible. However, there is some nuance to it. Thanks to the tools at our disposal, I believe it can be done without the negative consequences that some argue.
There are 4 common arguments people make against spending bitcoin that I will attempt to challenge. I hope this helps you as much as this journey has helped me.
Background
As it pertains to this article, "spending" is simply referring to using bitcoin as a medium of exchange - the value transfer to facilitate a transaction of goods or services. This has occasionally been viewed as antithetical to “saving”. While I believe the benefits of saving bitcoin are indisputable, personally I think the asset is only as good as its weakest link. Saving and spending of bitcoin complement each other and both make the other stronger.
If Bitcoin is not a viable medium of exchange, that hinders its ability to be a good store of value, and vice-versa. Note, not all stores of value must be a medium of exchange, but that is a requirement of Bitcoin due to its mechanism of action. Bitcoin is ONLY valuable because of the properties that make it so. If you completely eliminate the censorship-resistant, globally-auditable transactions, it is no longer Bitcoin.
Over the years, many people have taken a firm stance against spending their bitcoin. The topic of spending sats wasn’t always controversial. In the beginning, Bitcoin was commonly recognized as a mechanism for spending. From the first public mention of the word, “Bitcoin”, Satoshi Nakamoto referenced its nature as a “Peer-to-Peer Electronic Cash System” in the title of the whitepaper that changed the world forever.
Spending your cold, hard coins seemed to become a major discussion of contention around 2015. There are multiple reasons for this, but a significant factor was the fact that people began to focus on transaction fees and throughput on the layer 1 timechain. By 2017, there were two popular alternative approaches to this, and subsequent ‘wars’ that ensued.
The first approach was the centralized project called Ethereum, which launched in 2015, and steadily gained popularity as time went on. This was a divisive development that some, at the time, viewed as an upgrade to Bitcoin. Some of the adopters praised this as a better means of “spending” than Bitcoin; thinking that this would be the solution to throughput and transaction fees - that turned out to be abysmally false. The launch of Ethereum set the stage for thousands of additional ‘altcoins’ and scams with similar claims to propagate. This is a war that bitcoiners are continuing to fight today.
The second approach was a proposed upgrade to the Bitcoin code called Segwit2x, which failed and resulted in a massive victory for Bitcoin. I won’t go into much detail since you can find a full history in the book, The Blocksize War: The Battle Over Who Controls Bitcoin’s Protocol Rules.
The key point to take away from this is that the failure of Segwit2x resulted in the adoption of a hard fork (non-compatible version) of Bitcoin called “Bitcoin Cash”. Bitcoin Cash was championed by Roger Ver. I bring this up because Roger built his persona on making Bitcoin an efficient medium of exchange; he was a strong advocate for “spending” bitcoin. A decade later, some people that consider themselves devout bitcoiners still associate spending bitcoin with the likes of Roger Ver in a negative connotation.
Those two approaches are responsible for a large portion of the framework that evolved into why people don’t believe in spending bitcoin. Ethereum led to altcoins and affinity scams - many of which have promoted their token as a medium of exchange; while Segwit2x led to many negative philosophical connotations of spending.
The sentiment seems to change over the years. Unironically, the current fiat exchange rate seems to have a major effect on the viewpoints of the masses as it pertains to spending bitcoin. The most persistent arguments have bounced around a bit in recent years and I will try my best to address those.
The First Argument: Gresham's Law
Gresham’s Law states that “bad money drives out good”. In general terms, it is a principle that explains the sociological nature of people holding onto more valuable money while they are able to exchange less valuable money for the same goods and services. This is a popular argument that I have seen many times. I think it is important to note, this can only be applied to commodity money accepted with the same face value. Because of this, I don’t believe Gresham’s Law can even be adequately applied to an environment with commodity money (Bitcoin) and fiat money (Dollars). To detail this reason, I will point to an excerpt from G. Edward Griffin’s “The Creature from Jekyll Island”:
From the very beginning, the desire for a larger money supply led to practices which were destructive to the economy. Unscrupulous merchants began to shave off a tiny portion of each coin they handled—a process known as coin clipping—and then having the shavings melted down into new coins. Before long, the king's treasury began to do the same thing to the coins it received in taxes. In this way, the money supply was increased, but the supply of gold was not. The result was exactly what we now know always happens when the money supply is artificially expanded. There was inflation. Whereas one coin previously would buy twelve sheep, now it would only be accepted for ten. The total amount of gold needed for twelve sheep never really changed. It's just that everyone knew that one coin no longer contained it. As governments became more brazen in their debasement of the currency, even to the extent of diluting the gold or silver content, the population adapted quite well by simply "discounting" the new coins. That is to say, they accepted them at a realistic value, which was lower than what the government had intended. This was, as always, reflected in a general rise in prices quoted in terms of those coins. Real prices, in terms of labor or other goods or even of gold itself remained unchanged. Governments do not like to be thwarted in their plans to exploit their subjects. So a way had to be found to force people to accept these slugs as real money. This led to the first legal-tender laws. By royal decree, the "coin of the realm," was declared legal for the settlement of all debts. Anyone who refused it at face value was subject to fine, imprisonment, or, in some cases, even death. The result was that the good coins disappeared from circulation and went into private hoards. After all, if the government forces you to accept junk at the same rate of exchange as gold, wouldn't you keep the gold and spend the junk? That is what happened in America in the '60s when the mint began to issue cheap metal tokens to replace the silver dimes, quarters, and half-dollars. Within a few months, the silver coins were in dresser drawers and safe-deposit boxes. The same thing has happened repeatedly throughout antiquity. In economics, that is called Gresham's Law: "Bad money drives out good."
This happens in commodities because they are not always immediately and precisely verifiable. An example of this would be two coins that are both stamped with the same markings and are both the same size. However, one coin is lined with lead, while the other is pure gold. The government, in this example, tells the economy that both coins are worth $10 but you know you could smelt the second coin down and it would actually be worth double the value of the first coin as raw gold bullion. No one in their right mind would get rid of the second coin if they could, instead, spend the first; as long as they both have the same face value. This is a very close example to what actually happened with coins in the US over the last 100 years. The pure coins have been removed from circulation due to this exact reason.
Bitcoin cannot be shaved, clipped, adulterated, or defaced. Bitcoin is unique because it is the first form of commodity money that is immediately verifiable with certainty by anyone. Gresham’s Law does not account for this. A necessary component of the principle requires an inferior version of a like form. There is no inferior version of bitcoin that is forced to have the same face value through legal decree. Furthermore, the discrepancy must be recognized by the market, as noted by Griffin’s example of discounting. In my opinion, this principle simply cannot apply to any version of fiat money and there is no reason to hoard bitcoin due to Gresham’s Law.
Despite the fact that I believe some people are inappropriately applying the concept, I will expand on how it can still make sense to some. As a thought experiment, I'll provide some practical application since it's a popular argument.
“How Does Gresham’s Law Relate to Bitcoin?” is a detailed article on this topic written by Don (aka @KC_Hodl). Don uses examples to argue that fiat is the bad money that will be quickly spent and bitcoin is the good money that will be hoarded. For this reason, he believes that bitcoin is not suited to be used as a method of spending until a majority of people are saving in it.
I think a practical way to interpret Don’s conclusion is to say, “bitcoin is not suited to be used as a method of spending until a majority of the people participating in the economy are holding it as a result of saving.” He might be convinced that the amended statement is equally true to the original, but adds the important amendment, “in the economy”. This is important because spending money is simply a mechanism to satisfy a coincidence of wants. If the particular money is not useful to the participants of the economy, then the market will find an alternative.
I believe we can defeat this argument’s amendment with the use of a relatively old concept novelly applied to this subject - Currency Swap. A currency swap can allow market participants to offload an inferior currency while injecting a superior currency into their economy. We will dive into this in more detail in The Fourth Argument below.
The Second Argument: Cost
Two types of costs are commonly associated with spending bitcoin: transaction fees and opportunity costs. The former was a big reason we ran into issues with altcoins and forks, as mentioned above. Transaction fees have been and continue to be (to a degree) a selling point against bitcoin. This narrative has been adopted by news media, altcoin projects, and spiteful cantillionaires. It is, however, a losing argument. The Lightning Network has gained enough popularity to become relatively mainstream and allows for nearly zero-fee, instant transactions that may be settled on the main Bitcoin blockchain at any given time.
The second cost commonly associated with spending sats is the opportunity cost. Bear with me here, because this is where conversation tends to break down. People often have working definitions and moving goalposts as it pertains to this subject. It is important for us to make sure we are on the same page. People often say things like “My sats are too valuable to spend, so I’ll spend dollars instead.” But the person that says that, does not understand that spending sats and spending dollars have the exact same opportunity cost. Spending $5 worth of sats is the same opportunity cost as spending $5 of US government debt notes.
If you want to spend bitcoin, but don’t want your relative position to decrease, all you need to do is maintain the same distribution of sats and dollars. In easy terms, this is often referred to as “Spend and Replace”. You can simply spend the $5 of sats, then buy $5 of sats with dollars. Keep in mind, doing this may cause you to incur a taxable event in the eyes of the IRS. There is another method that I alluded to earlier to accomplish the same goal without the potential tax burden. This is done using the Currency Swap method. Again, this will be explained further in The Fourth Argument. As you might be catching on by now, this “Currency Swap” is a pretty big deal in terms of tools to spend bitcoin in our current economic environment.
The Third Argument: Code of Conduct
If I had a sat for every time I heard someone tell someone else what they should and shouldn’t do with their bitcoin, I might have made a whole coin by now. The truth is, Bitcoin is money. Therefore, people will have the ability to use it as they see fit. Nonetheless, it is a common trope to see “selling bitcoin” as taboo in the Bitcoin spheres on the internet and among groups dedicated to Bitcoin banter. Some people view “spending” as the same thing as “selling” (for dollars). One explanation for this is because, early on, there weren’t vendors or laborers that would accept bitcoin as a form of payment; therefore forcing an actual sale of bitcoin to dollars in order to render payment. This conflation still lingers despite the introduction of new infrastructure, tools, and participants that can now facilitate direct, bitcoin-denominated, and settled, peer-to-peer transactions.
A counter-point I’d like to make on the topic of conduct is the nature of the money itself. Bitcoin is a noble money. It is a money of virtue and integrity. It doesn’t arbitrarily rob or enslave people and their labor like fiat does. It is absolutely transparent and incorruptible. The rules in Bitcoin are the same for any one person as they are another, regardless of status, geography, ethnicity, or viewpoints. Bitcoin does not, and can not, discriminate.
I believe this point was well articulated by an anonymous guest on the Bitcoin Rapid-Fire podcast with John Vallis. The guest, @DNComply explains that you are bringing the integrity of Bitcoin to each transaction you participate in. This results in a better trade for both parties and incentivizes honest and pure behavior. He gives an example of the problem with a contractor needing to compensate for losses due to the inefficiencies and shortcomings of fiat. This can result in something as simple as using inferior sheetrock for a construction project to make up for the loss that will inevitably occur by simply holding an ever-diluting form of money. John goes on to say that he relates this embodiment of the most virtuous behavior as archetypical of Christ. I personally don’t believe Bitcoin is “God money”, nor should it be worshiped or idolized. What I do believe is that there is overlap in the desires God has for us as his children and the novel features Bitcoin affords us in our transactions with one another. The Bible tells us what we ought to think about, and I believe that should be applied to all areas of our lives, including how we transact with others in trade.
Finally, brothers, whatever is true, whatever is honorable, whatever is just, whatever is pure, whatever is lovely, whatever is commendable, if there is any excellence, if there is anything worthy of praise, think about these things.
Philippians 4:8, ESV
The Fourth Argument: Taxes (United States)
Disclaimer: I am not a tax professional. None of this should be taken as tax advice. This is my personal interpretation of the laws surrounding this topic. All tax guidance should be taken from the tax code of your jurisdiction and/or a qualified tax professional.
The topic of accounting for, and paying, taxes is one of the most commonly misunderstood areas of spending bitcoin. It is true that if you buy bitcoin and the fair-market dollar value of that bitcoin increases from your cost-basis by the time you “spend” that bitcoin on goods or services, you will absolutely incur a taxable event due to the Capital Gains Tax (in the US).
You’d be surprised to know how many people I run into on a regular basis that think, “As long as I don’t ‘sell’ my bitcoin for dollars I’m not going to be taxed on spending my bitcoin”. This is very clearly not the case for most people. The exception to this is if your cost basis goes down. As I understand the law, you don’t need to report a taxable event in a capital loss, although it may be advantageous to do so. However, since, on average, the exchange rate of bitcoin tends to go ‘up-and-to-the-right’ over any long enough timeframe, most bitcoiners find themselves in capital gain territory - not capital loss.
There are 3 ways to address the capital gains tax law issues in the US.
You could break the law and not pay taxes.
This is not an advisable strategy and may result in some very undesirable outcomes. If you decide to go down this road, you have my sympathy, but I certainly don’t condone it. As much as I personally disagree with the tax situation in this country, I still believe that breaking the law is not the best way to accomplish the goals of fixing the problems. Bitcoin will fix the tax issues eventually, but we don’t need to commit a crime to do it. There are two areas of scripture I reflect on as it pertains to this:
We are to obey the laws of the land as taught by the Apostle Paul in Romans 13:1,
“Let every person be subject to the governing authorities. For there is no authority except from God, and those that exist have been instituted by God.”
Jesus explicitly addresses paying taxes to Simon Peter in Matthew 17: 24-27.
24 When they came to Capernaum, the collectors of the two-drachma tax went up to Peter and said, “Does your teacher not pay the tax?” 25 He said, “Yes.” And when he came into the house, Jesus spoke to him first, saying, “What do you think, Simon? From whom do kings of the earth take toll or tax? From their sons or from others?” 26 And when he said, “From others,” Jesus said to him, “Then the sons are free. 27 However, not to give offense to them, go to the sea and cast a hook and take the first fish that comes up, and when you open its mouth you will find a shekel. Take that and give it to them for me and for yourself.”
You could spend your bitcoin and keep track of your taxes.
This is also not advisable. Although I don’t suggest breaking the law to not pay your taxes, I certainly don’t support paying the government more than you have to - especially if you can pay them nothing (legally). This leads us to the third option.
You could simply save your bitcoin and not spend it.
This is the method I suggest.
“Wait… didn’t you just waste the last 20 minutes of my life advocating against this?” Bear with me, reader. Here is where things get interesting. Some people are already familiar with this trick, but this is where we tie back into our topic from earlier - “Currency Swap”.
You don’t have to “spend your bitcoin” to pay someone in bitcoin. A Currency Swap (CS) can get us the best of both worlds in our current tax structure. A CS allows you to spend fiat "as" bitcoin. With a CS, you can buy and hold bitcoin, and send and spend your fiat in a manner that accelerates adoption, increases privacy, and reduces censorship. Best of all - there aren’t any implications for tax purposes since you are actually sending fiat instead of your bitcoin (that is what my tax professional told me). There are no capital gains taxable events for sending dollars. In this sense, it would be akin to sending dollars over CashApp, Paypal, Venmo, or Zelle.
At the time of writing this article, most people are still heavily inundated with the fiat world. For most of us, we still receive a fiat paycheck from our jobs in the “fiat mines”. For that group of people, the CS method is easy because we have fiat we can spend. If you are already in the “Get on Zero” club, then this isn’t for you, and you are already way beyond the scope of this writing. For that group, I salute you.
We briefly covered the "Spend and Replace" (SR) method of spending bitcoin earlier. That is the best way to maintain your allocation but typically incurs a capital gain taxable event that the IRS might not appreciate you not reporting. The CS method and the SR method both include the exact same steps and accomplish the exact same goals. The only difference is the order in which the steps are done and who is the party responsible for sending the bitcoin.
Spend and Replace:
₿ sent to retailer
*₿ is sent by you, not the exchange
You send $ to exchange
Currency Swap
You send $ to exchange
₿ sent to retailer
*₿ is sent by the exchange, not you
In both scenarios, you and the retailer end up with the exact same amount of sats. As you may be able to tell, it's all semantics. The only difference is that you are not personally responsible for the government's cut with the Currency Swap method. This saves you time and a serious headache; and in extreme cases, keeps you out of jail.
“So, how do I do a currency swap?” Thankfully, a currency swap is very easy to do. The most popular and reliable way to do this efficiently is with Strike. I made a 50-second video showing how I do this if you are into that sort of thing.
Although this article isn’t intended to be an ad for Strike, they are the only ones that have brought this solution to the market in a meaningful way so far. In the future, I’d like to see more companies, bitcoin exchanges, and custodial wallets incorporate this feature into their products. Sending a payment as a currency swap is as easy as sending a payment on any payment app or wallet. You just need to “send” fiat to a Bitcoin address or Lightning invoice. You send fiat, they receive bitcoin. It’s really that simple. And, best of all, there is no capital gains tax responsibility for you.
It is important to note that receiving bitcoin for goods or services rendered is likely to be taxed as income, just as if it were dollars. So, keep that in mind.
Summary
The intention of this was to expand on the common arguments against spending bitcoin, and why I disagree with them. I hope I addressed those in sufficient detail to persuade you to consider the implications of how making bitcoin payments might actually improve adoption, the circular economy, and the infrastructure for all bitcoiners. The details regarding the astounding benefits this can provide are too much for this segment, but I intend to follow this up with a “Part 2” that focuses on the importance of spending bitcoin.
In the meantime, get out there and spend your fiat “as” bitcoin. You have nothing to lose.
Image Sources:
https://oracle-patches.com/en/cloud-net/the-publication-of-bitcoin-whitepaper
https://www.amazon.com/Blocksize-War-Control-Bitcoins-Protocol/dp/B096CLR1SS
All other images are self-owned and created using Midjourney