Time preference is a simple and important but often misunderstood concept when it comes to Bitcoin and how you spend your time in all areas of your life. Read on learn more about how you can use it to improve your life.
Your investment goals and those of the people around you will rarely ever be the same. This stems from the preferences each individual has given their circumstances. Therefore, you might either need or want to get your return on an investment sooner or later than most.
The decision you make regarding how long you can afford to wait until you get a good or your return on an investment is basically your time preference. When it comes to holding Bitcoin, time preference is one of the most hotly debated subjects, even when the debate is not framed in these terms. Here is what people mean by low time preference and high time preference when it comes to Bitcoin.
Defining Time Preference
The first and most important factor to point out when defining time preference, is its subjectivity. There are no absolute measures for time preference, meaning that low time preference and high time preference are highly relative; they must be measured against the aggregate time preference of several individuals or against the average time preference.
What is High Time Preference?
High time preference is defined as focusing on immediate well-being as compared to the average person. Focusing on deriving benefits in the immediate future has a cost. A person with high time preference discounts future returns to enjoy benefits in the immediate future.
What is Low Time Preference?
Low time preference is the opposite. An individual who is willing to forgo immediate benefits for the potential of increased returns in the future as compared to the average person, has a low time preference.
How does Bitcoin Fit into the Time Preference Framework?
When it comes to Bitcoin, time preference is crucial, and it might also reflect the individual’s attitude towards traditional markets. Given that traditional fiat currencies are inflationary while Bitcoin is deflationary, means that hodlers should tend to derive more benefits from their holdings if they have low time preference.
This is not an absolute truth. Many individuals understand how to move in and out of Bitcoin to derive fiat profit periodically. Some of these individuals might seem to have high time preference, but they are really playing with fluctuations in the market to derive short and long term benefits.
Circumstance is a Key Factor
The circumstances each individual faces are also key factors in determining whether they have low time preference or high time preference when it comes to their Bitcoin holdings. Bitcoin is less widely accepted than fiat. Therefore, if a Bitcoin holder has bills to pay, an imminent event that requires liquidity or is simply older than the average Bitcoin holder, they might have high time preference.
What does Low or High Time Preference Look Like in Bitcoin?
Nevertheless, to determine the time preference of any given individual who holds Bitcoin, it is necessary to know for how long the average person holds Bitcoin for. That is quite difficult to determine. There are various surveys out there that aim to determine just what low and high time preference look like when it comes to Bitcoin.
Is it All About Price?
Most of these surveys focus on Bitcoin prices. That might be because most people see Bitcoin as an investment. This is why a split along ideological lines might well be the most important factor when determining the time preference of Bitcoin holders. Those who think Bitcoin is a superior currency or that traditional markets are bound to fail soon, will likely have low time preference with regards to their Bitcoin holdings. Those who are simply looking for fiat profit, might be more willing to discount future returns in order to derive benefits in the near future, giving them a high time preference when it comes to their Bitcoin holdings.
Another factor that might determine time preference of Bitcoin holders is pure psychology. Since the deflationary nature of Bitcoin is clear, the incentive is to hodl. Therefore, time preference of Bitcoin holders and delayed or deferred gratification should be correlated somehow.
This psychological phenomenon can be the ultimate subjective measure that helps us understand where each of us stands on the Bitcoin time preference spectrum. When all else is equal – all other circumstances like age, imminent fiat costs/payments, or philosophical approach – Bitcoin time preference should be determined by the aggregate ability to defer satisfaction.
Who Blinks First?
Nevertheless, if we are talking about psychology and time preference with respect to Bitcoin, it is important to consider the panic or fear factor. Given its historic price volatility, an individual could break down if they see Bitcoin prices taking a dive. This could immediately prompt individuals who would otherwise have low time preference, to sell their coins suddenly.
Low Time Preference or High Time Preference: Who Has the Upper Hand?
A lack of price stability and a relatively short history contribute to the difficulty of determining whether an individual has low or high time preference when it comes to their Bitcoin holdings. Psychology is a key factor because there are too many unknowns. Therefore, it is difficult to determine objectively who has the upper hand when it comes to Bitcoin time preference. In theory, it should be those who have low time preference, but each time prices take a dive, reality challenges theoretical assumptions.
As far as we are concerned, Bitcoin’s superiority as compared with fiat currencies, means that low time preference should dominate in the market. But that is because we hodl hard. It is up to you to determine where you stand relative to the rest of the pack and how many wild Bitcoin roller coaster rides you can take.