A wallet is where you typically store your bitcoin after purchase, just like a physical wallet is used to keep your cash and cards.

Once you understand bitcoin and are ready to buy it, earn it or receive it as payment in exchange for goods and services, you should set up a wallet so that your counterpart has a digital address to send the bitcoin to.

Your wallet must also be secure and robust for storing your bitcoin. Nowadays, there are plenty of digital wallets to choose from and this guide offers comprehensive information to help you make the right choice.

Wallets can be hardware-based or software-based, can be downloaded on a mobile device, on a computer desktop or stored on paper by printing a QR code that enables access to the private keys.

WHAT IS A BITCOIN WALLET

A bitcoin wallet is an electronic device that allows you to send, receive and access your funds, similar to how a traditional wallet stores your banknotes or coins. In contrast with a physical wallet, a bitcoin wallet does not store actual coins but the private key — cryptographic data — that proves ownership and gives access to the actual money that is held on the blockchain.

Losing the private key or having it stolen is a Bitcoiner’s worst nightmare because it means the funds are lost. This is why securing this cryptographic data is the first thing you need to do when you acquire or receive bitcoin. Your private key could also be lost through hacking, phishing, computer malfunctions or the loss of the device itself.

In light of what happened to Celsius, Voyager, Three Arrows Capital and FTX in 2022, when they lost all their customers’ bitcoin through poor business practices, leading to their bankruptcies, the case for self-custody could not be stronger. While these bankruptcies were a difficult pill to swallow for the cryptocurrency industry, they were not Bitcoiners’ first rodeo with bankrupt exchanges, for the Mt. Gox hack in 2014 led to the initial movement of “not your keys, not your coins,” which has continued to this day.

Bitcoiners often refer to themselves as sovereign individuals. To be a sovereign individual, you must take self-custody of your BTC. To do this, you must learn about wallets.

WHY USE A BITCOIN WALLET

“Not your keys, not your coins” is a powerful Bitcoin mantra, meaning if your wallet doesn’t give you exclusive access to your private keys, you don’t actually own bitcoin. Instead, a third party — like an exchange — will hold it for you just like a bank keeps custody of your money.

Bitcoin was created to offer an alternative to the banking system so your wallet will give you financial sovereignty without intermediaries, protection from rehypothecation and the ability to store your wealth safely.

Bitcoin teaches you to take personal responsibility for your money, resulting in you storing your BTC safely and spending it wisely. One of the first things you must learn while exploring this path is how wallets work.

HOW DO WALLETS WORK

The Bitcoin timechain — also known as a blockchain — is a shared public ledger where all bitcoin value transfers are conducted through bitcoin wallets. The wallet’s private key is your go-ahead to use your coins, the authorization and verification that you are the rightful owner of the bitcoin in your wallet. It’s like the password that allows you to enter your online banking.

Private keys are 256 digits long, making them impractical for storing, transacting and securing your money. This is why they are protected in a bitcoin wallet that will automatically activate them for transacting, in pair with a public key.

When you create your bitcoin wallet, a seed or recovery phrase is automatically generated to retrieve your funds in case you lose access to your private key. A seed, mnemonic or recovery phrase is a succession of 12 or 24 words that will be used to generate any Bitcoin key you need to send and receive bitcoin.

Such wallet setup is homogeneous across the board, but different wallets exist to satisfy various requirements and preferences.

There are many types of bitcoin wallets, depending on your requirements. You should be aware that they all present some level of risk — in particular custodial wallets that third parties control. We recommended that you follow the guidance below to avoid costly mistakes and risk losing your funds:

• Don’t use a wallet that doesn’t give you recovery data.
• Don’t use a paper wallet unless you’re an advanced user and recognize the risks involved.
• Large amounts of bitcoin should preferably be stored in multisig wallets.
• Remember to set up recovery instructions for your heirs.

DIFFERENT TYPES OF WALLETS

Mobile wallets

Mobile wallets are apps like Bitcoin Wallet and BlueWallet. They are convenient portable tools providing a QR code for quick face-to-face transactions. Some even use near-field communication (NFC), allowing users to tap their phones against the merchant terminal without providing ID verification.

They come with significant risks as they are the least secure, given how easy it is to lose your mobile device. You can still restore your wallet on a new phone if you hold the private keys; however, due to their online reliance, you can lose access due to hacks that can lead to losing your funds. For this reason, they are best recommended for small transactions and are not suitable for storing large amounts of bitcoin.

Using two-factor authentication (2FA) for extra security, preferably an authenticator app like Google Authenticator, makes the wallet less vulnerable to hacks or sim-swap attacks.

Web wallets

Web-based wallets are usually exchange-based wallets like BitGo or Blockchain.com that let you store your bitcoin and make transactions. They are considered hot wallets because they are online websites that need an active internet connection.

Users’ private keys are stored on the provider’s server, which makes them highly vulnerable to hacks or confiscation if something goes wrong with the exchange. It is highly recommended to avoid storing the majority of your bitcoin in a hot wallet.

Desktop wallets

Desktop wallets, like Atomic Wallet and Electrum — one of the original bitcoin web wallets, around since 2011 — are open-source programs that can be downloaded on your computer and store your private keys on your hard drive.

While they are generally more secure than mobile or web wallets because you aren’t trusting third parties to hold your coins, they are still vulnerable to hacks through an internet connection.

Cold Storage wallets

Cold storage wallets are any form of wallet that live on a device that is not connected to the internet. Offline connection protects the wallet from any form of internet-based attack.

Hardware wallets and paper wallets are your typical cold storage solutions. There’s also deep cold storage, which is any cold storage wallet buried deep in the ground, secured in a vault or any such method so as to ensure your bitcoin is considerably more inconvenient to access than it otherwise would be.

Hardware wallets

Hardware wallets are physical devices, like USB drives, that store your private keys offline. They are not connected to the web and are usually considered very secure since computer viruses or online hacks cannot attack them.

Setting them up requires some technical skills, but the manufacturer usually provides a step-by-step guide that is easy to follow. Try the wallet with little money first to gain experience and feel more secure running a transaction. Only load it with bitcoin once you are confident enough to transfer significant money.

Always make sure you’re purchasing the hardware wallet from an original manufacturer like Ledger, Trezor or COLDCARD, as fake wallets retrieved in marketplaces like Amazon or eBay will steal your bitcoin.

Paper wallets

Paper wallets are also considered cold storage, requiring you to store your private keys offline on a piece of paper that you print out as a QR code. These can be quickly scanned to add the keys to a software wallet to make a transaction.

They are rarely used nowadays due to the abundance of alternatives, but they are very secure since no hacker can access and steal the passwords. They are also very private since there can’t be any dissemination of personal data on the internet.

Multisig wallets

A multisig wallet will require more than one private key to sign and authorize a bitcoin transaction, adding an extra level of security. It means that a number of people, generally two out of three (or three out of five), must approve a transaction limiting the chances that a hack or theft happens, which single-signature wallets are more vulnerable to experience.

The transaction is finalized once the required signatures approve it. There’s no hierarchical order among the signatures required; only the number of signatures per setup is needed.

WHAT TO CONSIDER WHEN CHOOSING A WALLET

Bitcoin-only Wallet or Multicurrency Wallet

Every cryptocurrency wallet will let you store bitcoin, but only some bitcoin wallets will let you store cryptocurrencies other than bitcoin. If you are focused on sound money with no distractions from other cryptocurrencies, consider the options we provide here and just focus on a secure bitcoin-only wallet that grants you control over your private keys.

Research Wallet’s Reputation

Bitcoin Magazine endeavours to provide you with tutoring on the most trusted and reliable bitcoin wallets in circulation; however, plenty of material on the internet offers you a clear understanding of the different wallets and their reputation. Software engineer and Bitcoin advocate Jameson Lopp, for example — who is also CTO and co-founder of leading self-custody solution Casa — provides some of the most reliable and comprehensive educational material related to Bitcoin on his personal website.

Research Wallet Backup Options

It can never be stressed enough that backing up your wallet should be a priority. The fundamental recovery option you have is to back up your private keys securely by writing down and storing your wallet seed phrase in a safe physical location that you remember.

Never do this online, not even on the cloud or your computer, where your funds are always at risk that hackers could steal them.

Research Key Management

Private key management is an essential component of your wallet; think of how your bank account is protected and you’ll get the idea. Learn if your private key has an automatic cloud backup or a manual one; if your wallet lets you store your keys externally or on the same device as the wallet application; if multiple independent keys manage it.

Understand the purpose of your wallet

Consider what’s most important to you when choosing your wallet:

• Convenience: do you need a wallet for daily transactions, for mobile use or trading?
• Security: this should always be your priority, regardless of a type of wallet.
• Anonymity: some wallets are more privacy-focused than others. Wasabi Wallet & Joinmarket offer high levels of privacy.
• Long-term investing: A wallet to store bitcoin as a long-term investment.
• Gifting: a wallet like Opendime which is suitable for giving bitcoin as a gift without revealing the private key.

HOW TO SET UP A WALLET

Setting up a bitcoin wallet is easier than it sounds and most devices are user-friendly and suitable for beginners. In most cases, it’s easy to follow the device’s instructions as you go through the process. However, below you can find the typical procedure of setting up a wallet:

1. Download and install the software, mobile or desktop wallet from the provider’s website only. You’ll need to follow the manufacturer’s instructions to set up a hardware wallet.
2. Use the device’s instructions; they’re usually easy to follow. Once you download the app or the software, you’re typically ready to use it.
3. Secure your private key by writing down your recovery phrase, so that you can restore your wallet should you ever need to do so;
4. Transfer only a small amount of bitcoin first to get some wallet practice.

Read More >> How to set up a Bitcoin wallet

Security risks when using a Bitcoin wallet?

Bitcoin wallets are a popular way to store and use your bitcoin. However, like all digital devices, they are susceptible to security risks. Some of the most common security risks associated with bitcoin wallets include the following:

• Theft: If someone gains access to your wallet, they can steal your bitcoin. So keep your wallet(s) in a secure and safe place at all times.
• Coercion: you may be physically coerced to hand over your stack (this is called a $5 wrench attack), which may be avoided with multisig and cold storage solutions.
• Hacking: bitcoin wallets can be hacked, which could result in the theft of your bitcoin. Hacking can occur in different ways, including phishing and brute force attacks.
• Malware: Bitcoin wallets can be infected with malware, which are programmed to steal your bitcoin. So ensure your Operating System is clean and virus free.

The most secure way to store your bitcoin is to use a hardware wallet in conjunction with a multisig solution. This is the approach you should take for the majority of your bitcoin or those that you intend to HODL for a long duration.

How to make your wallet more secure

When a bank holds your money on your behalf, the bank is responsible for protecting it so you don’t need to be concerned about the threat of a robbery, fire, flooding or any form of loss.

When you own bitcoin and you take personal responsibility for safeguarding it, you become your own bank and you inherit the same concerns that any bank manager or bank security professional would have. The onus falls on you, and you alone, to protect your wealth.

Luckily, there are many options available to us in the form of wallets which help us secure our investment. Some wallets safeguard your bitcoin more than others, so it’s essential to do your research before choosing one. Here are further measures you can take to make your wallet more secure.

Store your seed phrase safely

If you want to keep your seed phrase safe, it’s essential to store it in a secure place. You can take a few simple steps for more peace of mind: you can keep it on a piece of paper, in a cryptographically secure safe or on a metal plate like the ones provided by Coldbit or Blockplate.

Keep it hidden from others, and don’t tell anyone your seed phrase. Split the seed phrase in two for further protection and keep them separate. Be creative with your Bitcoin security, as long as you remember where and how to recover your funds!

Add 25th word

When setting up your wallet, the system recommends you safely store your seed phrase, which is typically a series of 24 words. Some wallets allow an additional phrase, the purpose of which is to further encrypt your root seed. If your 24 words are compromised, the person holding those words will unknowingly need the 25th word in order to access your root keys. This solution buys you the time to swap wallets, should you need to.

Use a multisig system

Using a multisig system is one of the best safeguards for your bitcoin. There are two types of multisig solutions: hosted — like Casa and Unchained, that hold the private keys for you — and unhosted where you inherit full control, and each version has their advantages and disadvantages.

Decoy passphrase

A decoy passphrase is a system used to protect password databases, allowing hackers to believe they have cracked the file, only to be given valid credentials which do not provide access to the private keys. Cybercriminals will still be able to crack that file; however, the passwords they will get back are fake or decoy passwords.

Use more than one wallet

Using more than one wallet and spreading your funds across them may reduce the chances of losing all your funds from one point of failure. Make sure you apply all of the security measures discussed above to all of your devices to strengthen their accessibility.

Access from a secure computer

Reduce your computer’s chances of being hacked and your funds stolen by using a device only dedicated to bitcoin management. It is worth it, as overused computers are more liable to pick up malware, particularly those with weak OS security.

Use in conjunction with a full node

Using your wallet with a full node represents the ultimate protection measure you could take to secure your funds. Moreover, running a full node strengthens the network, benefiting all Bitcoin users.

Using a node protects you against fraudulent activities: no rule breaker can affect your funds since you’re using a decentralized tool that allows you to act in a trustless environment. Make sure your lightweight wallet allows you to configure how to connect to your own full node.

INHERITANCE PLANNING

Nobody likes to think about leaving this world or being incapable of managing their money one day; however, you may have wondered what happens to your bitcoin when you die? If you’re managing your own Bitcoin keys, you’ll need to plan how to pass them on to your heirs.

Owning your own keys and being your own bank already requires a significant level of responsibility and thinking about your succession too might be discouraging for some. The first thing you should do is talk to your solicitor and create a will, so that the executor can pass down the knowledge of what you intend to do with your BTC.

There are typically two ways of dealing with the inheritance of your bitcoin, although they both require some legal assistance for peace of mind:

1. Manual method: You’re likely the knowledgeable person on this subject matter, so in addition to the private keys, you’ll need to pass on to your heirs the instructions explaining what to do with the private keys. The keys should be kept with trusted family members, a legal team or preferably a combination of both. It’s advisable to not provide full access to any one party, to ensure no party ever has complete control or premature control.
2. Paid for service: Service providers like Casa, can work with you to create an inheritance plan that allows your heirs to access your bitcoin at the right time, with the help of a legal and technical team that can unlock the funds for your beneficiaries.

You can also find a lot of useful tips on planning inheritance processes in a book called “Crypto Asset Inheritance Planning,” written by American attorney and entrepreneur Pamela Morgan, with the technical supervision of Bitcoin educator Andreas Antonopoulos.

FREQUENTLY ASKED QUESTIONS

Where can I buy a hardware wallet?

Always buy your bitcoin wallet from the most secure source, which is the device manufacturer or the official seller. Never buy from marketplaces like Amazon or eBay, as the device may be compromised — even if it appears new — and your funds may be stolen. It’s always best to spend more and secure your funds than regret not going the safe way to acquire a brand new wallet.

What is the best Bitcoin wallet for international people?

Most bitcoin wallets are available worldwide because they are open-source and decentralized devices. Wallets like Electrum, Blockstream Green or the hardware types are available to download or buy from most countries; therefore, picking the best international wallet means choosing the most suitable device for your needs.

How much does a Bitcoin wallet cost?

Most mobile or web wallets are free. However, if you want to invest in cold storage, the cost can range from $60 for a Ledger Nano S to over $200 for the extra secure Trezor Model T.

How do I set up a bitcoin wallet with no ID?

Most bitcoin wallets do not require ID verification. When buying a hardware wallet, you must provide details to receive the device. It is recommended to use creative ways to circumvent dispatch of your physical address or even your name, email and telephone number.

For example, the least you can do is provide a generic delivery address of a store near you (or not) that could receive the wallet as a service. You can even alter your name slightly, but the store may ask for proof of identity, so keep that in mind.

How long would it take to crack a Bitcoin wallet?

The good news is that if you use all the mentioned measures, it will be nearly impossible to crack your bitcoin wallet. If you use a web or mobile wallet in what’s called hot storage, your funds are at risk. If you’re using hot storage, make sure you use the most robust password possible.

It’s been calculated that a four-digit pin code takes as little as five milliseconds to crack, while the longer your password is, the better. Twelve random letters would take two centuries to crack with today’s technology.

Can law enforcement seize a bitcoin wallet?

Yes, they can. Though it depends on the type of wallet and the security precautions taken.

Hot wallets or wallets hosted by centralized service providers are the highest risk, as law enforcement agencies could easily crack a bitcoin hot wallet or persuade a centralized service provider to provide access to the private keys to freeze — or seize — your bitcoin.

A cold wallet device could be seized by authorities but, unless you provide them with the private keys, the password and recovery seed, that device is useless and they won’t have your bitcoin.

A multisig wallet, instead, is again your best protection against seizure because, even under coercion, you would not be able to provide the full set of keys to access your bitcoin. This is especially true if your keys are kept in separate locations or held by different entities.

Read More >> Bitcoin privacy and security guide

What happens If I forget my wallet password?

A wallet password can be retrieved or reset. It’s the private key you must be careful to keep secure at all times, as if you forget it or lose access to it, you may lose your funds.

IN CONCLUSION

Your wealth is at stake if you don’t protect your bitcoin and robust, secure and non-custodial wallets are the way to do it.

Generally, small amounts of bitcoin can be stored anywhere if you’re looking to trade or spend them. However, for more considerable amounts, multisig wallets in cold storage, used with a full personal node is the ultimate level of protection you can provide to your bitcoin.

Bitcoin wallets have been in the spotlight recently with governments, like the EU, trying to ban them or at least limit their privacy and autonomy from third parties. While Bitcoin cannot be banned or censored, its decentralization and sovereignty could be compromised by persecutory activities enacted by authorities.

With everything that’s been happening in the cryptocurrency industry for years, from a regulation standpoint to criminal activities, exchange hacks and so forth, Bitcoin is widening the gap with “crypto” and finding its own ethical stance supported by companies that are only involved with its monetary soundness.

It’s never been more important to take personal responsibility and custody of your bitcoin seriously, and learning how to secure it is that little extra effort that needs to be made to reduce the risk of parting from the most powerful asset you’ve ever held.

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By eliminating reasonable stores of value, the fiat economic system incentivizes us to seek debt, hope for luck and take on other poor habits.

Bitcoin changes our mental model and we can see it in a lot of people that get into Bitcoin. Many Bitcoiners start saving and not living paycheck to paycheck. Many start taking their lives more seriously and quit drinking alcohol and playing video games. Still others start investigating their diet and quit eating sugar, carbs, seed oils and other things they’ve been eating their whole lives. Some even get married and start having children. There are even some who start taking religion seriously.

These results are pretty puzzling. What does a digital money have to do with any of these things? Yet, to even ask this question is to ignore the environment that we’re in and the reality of fiat money. It’s difficult to see how the dirty water we’re swimming in affects us because we’re immersed in it. Only when we’re out of the murky water can we see objectively what was happening.

Fiat money has some terrible incentives at all levels and it’s the cumulative effect of these incentives that creates the self-destructive behavior that we see in so many people. We shouldn’t be asking why Bitcoin is getting people off of alcohol, we should be asking why people are drinking too much in the first place. We shouldn’t be asking why Bitcoiners are having more children, we should be asking why people are having fewer children under fiat money.

These are the questions I am seeking to answer in this series of essays. Where did the incentives of the modern world go awry? Spoiler: It’s fiat money.

In part one of this series, I’m going to look at individual incentives and how those incentives change how we live at a personal level. In further essays, I’ll explore this question at the company/group level, the national/country level and finally at the level of the entire world. This series will be built from the bottom up, and I’ll start here with the incentives at the personal/individual level.

Why We Lack Savings Vehicles

The current fiat system affects individuals in many different ways, but the most obvious way is with a lack of savings vehicles. Put simply, there really aren’t good stores of value in the economy. Every potential store of value has critical flaws that make saving more difficult than avoiding carbs at a bakery.

The reason that there aren’t very good stores of value is because our Keynesian overlords like it that way. Money that’s in a store of value isn’t moving, it’s parked and according to them, “not being productive.” They want the money to sluice through the economy and increase money’s velocity. The reason they want this is because they equate money moving around with prosperity. They make the dumb mistake of thinking that the velocity metric is reflective of reality.

Keynesians are famous for making such mistakes, measuring for instance the degree of employment as indicative of economic health. In a free market, the two have some correlation, but once the government starts making employment the target, say, by paying people to dig ditches and fill them back in, the metric itself becomes useless. Such behavior games the number and debases the metric in the same way that grade inflation does so to university degrees.

Velocity of money is similar. Trades that are done at the point of the economic gun of inflation are just as useless as the digging and filling in of a ditch. The actual productive trades are what you want, like money used for material to build ships, not unproductive trades, like venture-capital-funded tokens for some drooling chimp JPEG. This, by the way, is why metrics like “number of developers” on an altcoin ecosystem are so misleading. The metric is gamed by artificial rewards, and indeed, many of these developers are doing the digital equivalent of digging and filling ditches paid for by an altcoin’s premine.

The Keynesian overlords like this metric-driven way of accounting for an economy because it lets them justify just about anything the government chooses to do. War? That’ll create jobs and spur the economy! Welfare? That’ll get more people to spend and that’ll help the economy! Just about any government program can be justified. The only government action Keynesians don’t like is cutting spending. Government economists are Keynesian for the same reason false prophets proliferate. They tell the rulers what they want to hear and rationalize their policies.

Their policies aren’t against saving, per se, but they do justify inflation. And inflating is what every government wants to do because it lets them spend money they don’t have. For the inflation to look productive economically, it needs to be coupled with some rationalization on why it benefits the economy. Hence, they make saving more difficult than running an Ethereum full node.

Traditional Stores Of Value

Before Bitcoin, if you wanted to store value over the long term, you really only had three options. There’s real estate, which is scarce, but has a lot of carrying cost in taxes and maintenance. And then there’s stocks, which are vulnerable to all sorts of shocks both within and without. Finally, there’s gold, which was a great store of value for a long time, but hasn’t been since the advent of fractional reserve banking.

Indeed, gold is the original reason why fractional reserve banking exists and became so profitable. Banks for many years have issued loans of non-existent gold as paper certificates. Sadly, this continues today where many large gold depositories issue paper certificates of gold. This, in turn, inflates the supply of gold in the most liquid gold markets, which trade promises of gold delivery. Thus, physical gold is actually scarce, but paper gold is not. Like a Hollywood actress, paper gold is mostly fake.

I’m sure if you’re reading this piece that you have some suspicions about using fiat money as your store of value and I don’t need to belabor that point, but for the sake of completeness, I’ll explain why. Fiat money is extremely liquid but loses value very quickly. Keeping your money in the dollar is a great way to lose money over any reasonable period of time. The monetary expansion of the dollar has been extraordinary, with the M2 money supply going from $289 billion in 1959 to something over $21 trillion in 2023. Annualized, that’s about a 7% debasement every year. As we’ll see, this number is not a coincidence.

There are other stores of value, like sports teams, collectibles and Lego sets and even detergent and mackerel cans. On those, we’ll have more to say later. But suffice it to say that these assets all have even bigger drawbacks than the three we turn to now: gold, stocks and real estate.

Problems With Stocks, Real Estate And Gold

Here’s the problem with these stores of value: First, they all have large transaction costs. To transact in real estate is very cumbersome. Not only is the liquidity constantly fluctuating, but the time to settle is very long and there are large commissions, upwards of 3%, that you pay every time you buy or sell. With physical gold, there’s shipment to consider. Stocks have commissions and getting the right mix to properly diversify multiplies those commissions accordingly.

The second problem is that stocks and real estate require a tremendous amount of research. In a fiat economy you have to make money twice, once to make the money and once to keep the money. There’s no small amount of research that’s needed to properly invest in real estate or stocks. Two houses that are next to each other may have radically different values, perhaps because one has a faulty foundation or is in a different school district. Two stocks, even in the same industry, may have very different valuations, perhaps because one has a particularly competent management team or has access to a particular patent that the other does not. What’s worse is that this is research that’s not really productive to anybody. Trusting another person for research is a great way to get scammed out of your money (see: altcoins) and hence, the successful real estate and stock investors do their own research.

For physical gold, there’s also the problem of securing it. Do you really want to hold a 400 ounce gold bar in your house and put it at risk of getting stolen? Physical goods are very difficult to secure, which is why banks started in the first place.

The third problem is that there’s significant dependence on third parties. Real estate can be taken away through eminent domain laws. Public companies may have executive teams that commit embezzlement and fraud which may doom your stock. The gold depository may be raided by a government for their own coffers and even private gold can be confiscated by government dictate.

Running At 7% Per Year

Asset managers know that 7% is the benchmark for returns on their clients’ investments. Where did this figure come from? It’s not a figure that’s plucked out of thin air. Seven percent is the rate at which the money supply has historically been expanding. To get 7% returns per year in stocks is considered really good. Most real estate doesn’t get near that and based on data I have analyzed, gold certainly doesn’t.

The effect of not having a good store of value at the individual level is that there’s a whole group of rich people who have to keep working to keep their money. They’re on a monetary treadmill, having to run to stay in the same place. And if you know rich people, this is one of their defining characteristics. They spend an enormous amount of time managing their money. This is wasted effort and one of the reasons why when there’s mo’ money, there are mo’ problems.

Opting Out Of Extra Work

Is it any wonder, then, that a lot of people choose not to have to deal with managing money and end up spending it? This is, after all, what the Keynesian overlords want you to do. They want you to keep the money flowing whether it’s for something you actually need or not. Thus, we get a lot of conspicuous consumption among people who don’t want to run on the fiat treadmill.

Why not live it up now if the purchasing power is going to decrease quickly anyway? Why not buy a car or a handbag or a gourmet donut? If it’s too much work to keep your money, why not spend on something that’ll keep you entertained for now?

This is encouraged by the other side of the fiat equation: debt. Not only is saving really hard, but debt is really easy. Most individuals working a normal W-2 job have a tremendous availability of debt. Note for the next essay in this series that for self-employed individuals or entrepreneurs, debt is harder to secure. But for normal corporate employees, debt allows them to bring consumption forward. That is, they can have something now instead of being forced to wait and save with discipline. Debt has created lots of entitled, spoiled, immature adults.

Even for aspirational individuals, the desire to improve themselves doesn’t always work out. Many imitate startups in trying to fuel their growth through debt, such as through student loans. By “investing” in their education, they are attempting to make more money later. Except that’s not how many people who enter college use it. They instead use college as a four- to six-year vacation and indeed, about 40% of those who enter four-year colleges don’t even finish in six years. Investment turns to consumption because they don’t have discipline.

The high-preference mentality becomes much easier to fuel because of the availability of credit cards, mortgages, student loans, car loans and even personal loans. Our system tempts individuals with all manner of consumption while taxing any disciplined behavior.

Asset Inflation

The lack of good savings vehicles combined with the tremendous availability of debt means that we get a lot of asset inflation. That is, we get crazy values for things that are perceived to be scarce because there are so few good stores of value. People will invest in almost anything that has scarcity because they don’t want to lose their wealth slowly. Thus, we get high speculative prices for things like Michael Jordan rookie cards, Rothko paintings and New York City taxi cab medallions. When there are so few good stores of value, and liquid assets like stocks merely keep pace with monetary expansion, other scarce assets become more attractive. When there is no good store of value, everything becomes a crappy store of value.

What’s really unjust about this particular type of asset inflation is that the people who benefit are typically already very rich or just really lucky. Sports teams have beaten the 7% annual return by a significant amount and so has land in the Hamptons and Facebook stock before it went public. What’s common about all of these investments is that they are only available to the super rich. The minimum wealth to invest in any of those is in the millions, and it’s billions for sports teams. They are all vehicles that allow the rich to get richer.

Other assets that have done well are things that have suddenly become very popular. A lot of modern art, taxi cab medallions and even sports cards could have been bought early, but they required quite a bit of luck. After all, for every Rothko, there are thousands of artists who produced similar paintings but never got popular. For every Jordan rookie card, there are hundreds of rookie cards of players who failed to have decent careers.

Wanting To Be Lucky Rather Than Good

Investing in assets which beat inflation requires a large element of luck and that breeds a lot of resentment. The perception is that the people who benefited were at the right place at the right time. Such luck isn’t that different in substance to rent seeking. Investment has thus taken on this gambling quality. As a result, the values of the people in the economy have changed from a mindset of providing value to just getting into different investments before they become popular.

Indeed, this element of luck is also present in real estate and stocks. There’s an unfairness to these things because you had to be an insider in one of these communities (which are generally very rich) just to know what to have invested in beforehand. There’s also access to significant amounts of debt that’s required to get in on these assets with size. Many of the people who got rich on asset inflation didn’t provide any value to anyone, they got “lucky.” Which is to say, they worked hard to get into the right groups and get leverage so they could rent seek on the information they got, but such work doesn’t add value, so it’s more viewed as luck.

Illiquid, Non-Fungible Stores

Stores of value like real estate, stocks and Michael Jordan rookie cards are weak savings vehicles because they’re not fungible. One piece of land is not as good as another one and a share of IBM is not the same as a share in Google. The lack of fungibility not only means a general lack of liquidity, but also enormous risk. This is why stock managers are obsessed with diversification. There’s so many ways in which a particular stock can go wrong that putting it all in one basket seems like lunacy.

Thus, at an individual level, fiat money causes people to both work much harder to store their value, or if they give up on storing value and get into debt, to engage in conspicuous consumption. There’s also a deeper societal envy of the people who are rich because many of them get rich more by being lucky than by being skillful and adding value.

The people who want to keep their wealth have to work very hard while those who don’t care can pile up debt. The fiat incentives are to work as little as possible while consuming as much as possible.

Bitcoin Fixes This

At an individual level, these behaviors that we see in the fiat economy are heavily curbed through having a good savings vehicle. There is much less reason to “invest”/gamble if there is an alternative store value. The most productive people can keep providing value to civilization instead of working to keep the money they have.

We also wouldn’t have so much asset inflation. This means that assets like real estate can go to people who desire it for its utility and not as an investment. The store of value premium on these assets disappears and more people can own homes because they’ll naturally come down in cost. People will own only homes they use rather than homes for investment purposes. Similarly, Rothko paintings, Jordan rookie cards and Lego sets will be priced according to their utility. They will go to the people who value them for utility and not people looking for ways to outrun inflation.

Lastly, there will be much less debt availability, leading to less conspicuous consumption. Instead, capital will flow toward innovation and entrepreneurship, a topic which I’ll cover in part two of this series.

Sadly, fiat money has created some terrible incentives. Not only would most people rather be lazy and lucky than hard working and good, but even the people who work hard typically only have a limited positive impact because of the fiat treadmill they’re forced to run on. Many Bitcoiners have been unhooked from these fiat money incentives and their behaviors have changed accordingly.

Indeed, this is the real reason why so many people in the Bitcoin community seem to be getting their lives together. The ability to save and the freedom from debt really changes how we live.

Come for the returns, stay for the life change.

This is a guest post by Jimmy Song. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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