Use Bitcoin as Your Primary Money
If you consistently apply the three money management principles discussed previously for at least 180 days, you are ready to begin using Bitcoin as your primary money.
Keep Your Average Net Income Positive & Accumulate Cash Position (in Bitcoin)
The Fiat standard encourages us to keep our net income negative and accumulate non-cash assets (consumption and production). It encourages us to spend more than we earn in the present because we are spending our future money, which is likely to have less purchasing power than it does now. This comes at the cost of generating negative spirits (slavery, restlessness, and confusion, as discussed earlier). Because of this, many people who, by fiat standard, are considered to have high net worth nevertheless bear the burden of perpetual debt.
The Bitcoin standard encourages you to build your cash position by increasing your average net income (inflows minus outflows) over time. Your cash (savings held in Bitcoin) will increase in purchasing power over time, effectively providing you with an additional source of inflow.
There are five ways to increase your net income:
Reduce the outflow rate while maintaining the inflow rate constant. Assume you earn $100,000 per year and spend $90,000. You keep earning $100k per year but reduce your spending by $10k per year, from $90k to $80k. Your net income increased from $10,000 to $20,000.
Increase the inflow rate while maintaining the outflow rate constant. Assume you earn $100,000 per year and spend $90,000. You maintain your spending at $90k per year while increasing your inflows from $100k to $110k per year. This increased your net income from $10,000 to $20,000.
Increase the inflow rate and decrease the outflow rate. Assume you earn $100,000 per year and spend $90,000. You reduce your annual spending by $5,000, from $90,000 to $85,000. You also increase your annual inflows by $5k, from $100k to $105k. This increased your net income from $10,000 to $20,000.
Increase both the inflow and outflow rates, but increase the inflow rate more than the outflow rate. Assume you earn $100,000 per year and spend $90,000. You increase your spending by $10k from $90k to $100k per year and your inflows by $20k from $100k to $120k per year. Your net income increased from $10,000 to $20,000.
Decrease both the inflow and outflow rates, but decrease the outflow rate more than the inflow rate. Assume you earn $100,000 per year and spend $90,000. You reduce your spending by $20,000 per year, from $90,000 to $70,000 per year. You also reduce your annual inflows by $10,000, from $100,000 to $90,000. This increased your net income from $10,000 to $20,000.
Don't be concerned with the nominal amount of Bitcoin you own. The important thing is to keep your average net income positive and save in Bitcoin. As your Bitcoin savings grow in purchasing power, they will effectively create another inflow source for you: reconciliation balance adjustment.
For example, if you earn $60k per year and spend $50k per year, it makes no difference whether the Bitcoin exchange rate is $30k/BTC or $60k/BTC in terms of your net income and purchasing power. An increase in the value of Bitcoin means that your savings’ purchasing power has increased, but not necessarily your net income. Similarly, a decline in the purchasing power of Bitcoin does not always translate into a decline in your net income.
You will certainly increase your net income if you follow the principles outlined in the first section of the guide (keep a zero-based budget, stay debt-free, and set aside 10-20% of your budget for giving) and make sure your net worth composition is balanced (keep at least a third in Bitcoin, and no more than a third in consumption and capital goods, each).
Frequently Reconcile Changes in Bitcoin's Purchasing Power
We're accustomed to using fiat money as our cash balance, whether it's physical cash in our wallets or money in our checking and immediately available savings accounts. Most bitcoiners view Bitcoin as their "investment," "retirement fund," or "long-term savings" and treat it as an illiquid asset on their balance sheet.
If you've successfully implemented the previous three steps as a rock-solid foundation (running a zero-based budget for at least 180 days, eliminating all debt from your balance sheet, and establishing a regular giving practice with 10% to 20% of your budget), you should strongly consider treating Bitcoin as part of your cash balance and transitioning to the full Bitcoin standard.
When you begin using Bitcoin as part of your cash balance, you'll need to introduce one more practice into your zero-based budgeting: purchasing power reconciliation. How does this work?
Let's say you currently hold $10,000 worth of Bitcoin, which you use as your cash balance, and you don't have any other forms of money at the moment. This $10,000 in Bitcoin is all you have. Consequently, you'll allocate $10,000 to your budget categories until there's nothing left to assign.
Let's use our example of $10,000:
Total Budget: $10,000
Giving: $2,000
Shelter: $2,000
Groceries: $2,000
Transport: $2,000
Everything Else: $2,000
However, what should you do if the Bitcoin exchange rate suddenly drops by 20% in a day? If your Bitcoin is suddenly worth $8,000, you need to adjust your budget categories because your budget currently has $2,000 assigned more than you actually possess.
To balance the budget, subtract $2,000 in total from your categories, which is $400 from each:
Total Budget: $10,000 -> $8,000
Giving: $2,000 -> $1,600
Shelter: $2,000 -> $1,600
Groceries: $2,000 -> $1,600
Transport: $2,000 -> $1,600
Everything Else: $2,000 -> $1,600
Now, our budget is back in balance.
What should we do if the Bitcoin exchange rate increases by 20% in a day? We perform budget reconciliation once again. Initially, we assigned $10,000 in our budget, but now we have $12,000 in the budget, meaning you have an extra $2,000 to allocate. To balance the budget, add an extra $400 to each category:
Total Budget: $10,000 -> $12,000
Giving: $2,000 -> $2,400
Shelter: $2,000 -> $2,400
Groceries: $2,000 -> $2,400
Transport: $2,000 -> $2,400
Everything Else: $2,000 -> $2,400
Once again, your budget is back in balance, with no unassigned money.
How often should you perform this reconciliation? It's up to you, but I recommend doing it frequently, especially when the change is more than a few percent in either direction. Each time you reconcile the budget this way, you have the opportunity to fine-tune the assigned amounts in different categories.
Why Do This?
"Bitcoin is too volatile!" you'll often hear. "Just dollar cost average and don't touch your stack."
Many well-intentioned Bitcoiners recommend, especially to newcomers, adopting a "stacking sats" approach. They suggest that newcomers set up an automatic "dollar-cost averaging" (DCA) plan by deciding on two fixed elements: the amount they wish to invest (for example, $50) and a recurring time period (say, every month).
By doing so, you can "set it and forget it." You are buying Bitcoin regularly, whether the price is increasing or decreasing, thus averaging out the fluctuations. This strategy has indeed outperformed similar investments in other popular savings instruments like stock indexes, bonds, real estate, and precious metals.
Nonetheless, this strategy has several risks that are rarely discussed. Here are some of them:
You will experience feelings of greed (FOMO) in a bull market.
When the true Bitcoin bull market begins, typically some time after the "halvings" due to the new marginal supply being cut in half, it's very likely auto-DCA bitcoiners will feel "underinvested" in Bitcoin. Whatever fiat they still have, they will start to fear that the Bitcoin price will run away from them.
This is where auto-DCA services will typically market their "smash buy" and "boost" features, meant to alleviate this FOMO feeling by doubling down or increasing their DCA rate. However, this can quickly lead to unwise decisions, because it is extremely difficult to resist the temptation to allocate a larger portion of one's portfolio to Bitcoin during a bull run.
Consequently, many people are compelled to abandon their auto-DCA strategy at some point and attempt to time the market to compensate for the opportunity cost of not allocating more during the bear market period.
This behavior is precisely the opposite of what you should be doing during a bull market. You should be focusing on planning for your future outflows and utilizing the appreciation of your Bitcoin savings, even if you feel underinvested in Bitcoin, to cover them. Essentially, during a bull market, your time should be spent using your past budgeting data to better plan for the future, rather than trying to earn more money at your job and studying Bitcoin price action to make up for the opportunity cost incurred during the bear market.
Your inflows and outflows are in flux, but your strategy does not reflect this.
If you begin your auto-DCA strategy with the intention of putting it on autopilot and "setting it and forgetting it," you are not taking into account changes to your future inflows and outflows.
If your inflows increase, you'll be tempted to adjust the amount you allocate, and if they decrease, you'll want to reduce them and/or spread them out over time. Essentially, the only way to truly "set it and forget it" is to set it to a very small number that is evenly distributed across maximum time intervals. If your dollar cost average is only $1 per year, you can likely sustain this for the rest of your life, but the gains will be negligible, despite Bitcoin's volatile and intense path to becoming the dominant form of money.
Additionally, a "set it and forget it" mentality is detrimental to your long-term approach to learning how to properly manage your money. You are in a constant state of change, as is your time preference and your valuation of different goods and services.
When Bitcoin Purchasing Power Decreases, Increase Your Net Income
Assume that your Bitcoin purchasing power will decline by 10% per month for the next eight months. If you knew this was going to happen, you might think it would be smart to sell Bitcoin for fiat and then buy it back later for a bargain, right? Wrong.
By sticking with your declining purchasing power savings vehicle—Bitcoin—two things will inevitably happen:
First, you will seek ways to reduce and optimize your outflows.
You will reduce unnecessary spending, learn how to make bulk purchases, and consider the time value of money more carefully. You will understand duration risk and how it works, and you'll discover previously unknown ways to save money. In general, you will save energy to achieve the same or possibly better output. Staying in this mindset will provide valuable lessons for the future. It will encourage you to cultivate gratitude and contentment, which will gradually permeate your entire being.
Second, you'll look for ways to increase your inflows.
If you have an employer, you will begin to change your attitude toward them. You'll quickly realize that you shouldn't refer to him as your boss or employer; he is, in fact, your client. He's buying your most valuable resource: your time. When you sell your time to a client, you want to give them the best service possible. You'll also realize that you may be working with multiple clients. You'll start organizing your time, which is the asset you're selling.
Ask yourself:
How much of this asset do you own?
Next week, can you sell 36 hours of uninterrupted time?
Can you plan out 30 hours of very high-quality flow state time for the next five days on Sunday?
Be thankful for your clients. Be grateful that you can meet the needs and desires of others by selling your time. This is God's work. God rewards your service to his children by blessing you with higher inflows.
Staying in this mindset during the bear market will provide valuable lessons for the future. It will encourage you to cultivate gratitude and contentment, which will gradually permeate your entire being.
When the 2022 Bitcoin bear market started, I adopted the practice of writing down three things I'm grateful for, six days a week. By the end of the year, I had written over 300 things I'm grateful for, which slowly but surely grew my optimism about the future. When you have a spirit of optimism, people like to work with you, and this inevitably leads to increased inflows.
When Bitcoin Purchasing Power Increases, Decrease Your Net Income
If you keep your budget up to date, you will be able to see your expense rate (per month, average, and across all categories). During bull markets, you should plan your future spending rate using your expense rate data and make upfront payments for those future costs. By doing this, you can lower your expense rate and increase your future net income rate since you have already paid for it in advance.
If you adhere to a strict Bitcoin standard, you will inevitably experience periods of Bitcoin purchasing power appreciation, also known as bull markets. If you also maintain a zero-based budget, you'll see that your budget grows during these times, and you have additional money to assign to your categories.
At this point, you should review your budgeting history and note your outflows. Consider how many of these outflows you will likely repeat in the future. If you have been budgeting for the previous six months, you can approximate your outflows for the following six. If you did it for two years, you may anticipate the following two years.
Because the future is uncertain, this act of projecting future outflows will never be precise. However, as a practice, it is still very useful because you at least have an idea of what you can expect in terms of what you find valuable to spend money on and how much it is likely to cost.
Let's say you discovered that you are spending $600 per month on your Shelter (assume in this example we are renting, and the total average cost for rent, utilities, and everything else you may spend in the Shelter category per month is $600 for the past two years). Let's also assume that your shelter category has about $3,000 in it, which means you have about five months' worth of savings. During a bull market, if your total purchasing power increases fivefold, you might find you have about $15,000 in the Shelter category, or about 25 months' worth of expenses, saved up.
In this situation, you should consider your future Shelter outflows and how you can pay for them now. If your rent is $450 per month, your utilities average $100 per month, and you spend an additional $50 per month on miscellaneous necessities, it would be wise to use your budget surplus to prepay some of these expenses.
If you pay your next, say, 24 months' worth of rent in advance, your landlord will probably agree to a discount. Even though he would get $10,800 over the next 24 months if you paid $450 a month, he might accept your offer to pay him $10,800 up front and add a couple of extra months of rent so that you sign a contract for the next 29 months. You are eliminating his occupancy risk, so he would likely accept your proposal.
It's possible to optimize your utility bill as well. Look into advance payment options for utilities like electricity, water, and internet to see if you can save money by paying up front. It is worthwhile to explore this.
Examine your spending and the items you are purchasing in addition to your rent and utility bills. For instance, take a look at your annual spending on cleaning supplies. Can you buy some of these in bulk and shop around for a discount? If you do this and buy in bulk, you will probably find ways to get the same value for less money.
What ends up happening is that by doing this, you will be able to pay for your future Shelter category outflows at a discount, all while taking advantage of Bitcoin's purchasing power appreciation. When you see people getting into Bitcoin while still in debt or buying Bitcoin with leverage, you can be certain that the more intense Bitcoin purchasing power appreciation becomes during the bull market, the sharper its drop will be when the liquidation cascade starts in the bear market.
For all other categories in your budget, consider the following ideas:
Groceries: As you continue with your zero-based budget, you'll gain more insight into your food expenses. During the bull market, explore ways to pay for your future groceries in advance. It might be wise to purchase red meat in bulk and freeze it or pay a rancher to raise cattle that you'll only consume in 2 or 3 years. Apply similar strategies to other food expenses. The more you can think of buying food in bulk or paying for future consumables now, the better prices you'll secure and the fewer outflows you'll face during the bear market.
Transport: If you're saving up for a car, the bull market may provide an opportunity to purchase the car you've been planning for. Additionally, consider prepaying for your ongoing transport costs. Review your spending in the transport category and seek ways to optimize it by prepaying for future expenses.
Clothing: Bull markets are an ideal time to refresh your wardrobe. Also, review your budget to gain insights into your clothing spending habits, where you typically shop, and how you can make bulk purchases and prepayments. Often, you'll receive discounts when buying clothing out of season, such as shopping for summer clothing during the winter and vice versa.
Personal Computer / Phone / Electronics: Now is the time to consider upgrading your electronics.
Travel / Vacation: Take advantage of your increased purchasing power to plan for future trips. Shop around and compare prices for your planned travels in the future. Generally, paying for your trip further in advance results in lower costs. Last-minute arrangements tend to be the most expensive, so use your resources to secure deals that you can pay for now but will enjoy in the future.
Net Worth Composition Rebalancing
Make sure to assess your total net worth composition and decide if you want to rebalance it by spending some of your cash (Bitcoin) and increasing the consumption goods and capital parts of your net worth. Remember not to exceed one-third of your total net worth in consumption goods and no more than one-third in capital.
If, during a bull market, you reallocate a third of your Bitcoin to production (capital) goods and the remaining one-third to consumption goods, consider what you will do if the purchasing power of your Bitcoin decreases during the subsequent bear market. Would you prefer to continue building your Bitcoin position with your net income, or would you prefer to reallocate some of the capital and consumption goods back into Bitcoin?
It might be a good idea to avoid allocating Bitcoin to capital and consumption goods to the full extent of one-third of your net worth each. You will likely have a higher net income if you hold a greater proportion of your net worth in Bitcoin; therefore, a larger giving budget will likely have a greater impact on the growth of the spirit of generosity.
Notes on Bitcoin and Debt
In bear markets, you want to be able to increase your inflows, and being debt-free is critical for this. If you are carrying debt during a bear market, you are exactly decreasing your performance at work at a time when you should be increasing your revenue to take advantage of the declining price of Bitcoin.
This situation feeds back on itself because the bear market increases your anxiety about your debt, which in turn causes your income to decline (or not grow) while you are still required to make payments that you took out when Bitcoin's value was higher.
In the end, you lose out on the chance to raise your net income during a downturn in the market. In a bull market, this increases the risk of experiencing FOMO, and the cycle continues.
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