Should you pay off your debts or keep hodling your #Bitcoin?
This is one of those situations where the game-theoretic best move isn’t necessarily the one that feels the best.
It feels good to be debt free, but the legacy system rewards people for taking on debt in several ways. Here are a few:
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Inflation. Debts denominated in fiat become easier to repay over time as fiat devalues.
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Interest rate control. In a market system, the interest rate is the price of borrowing. It tells borrowers and lenders whether it’s a good time to borrow or lend. But interest rates are manipulated by the central bank, often pushed downwards to incentivize borrowing beyond what the market would otherwise bear.
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Bailouts. Government programs increasingly offer explicit aid for people who borrow during times of credit contraction. For example: the home buyer tax credit after the Global Financial Crisis in 2008, or the Paycheck Protection Program in 2020.
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Bankruptcy. Even if you’re wiped out, bankruptcy proceedings protect some assets like your homestead. A bankrupt person loses their assets and credit score, but there is no debtor’s prison, and the record clears after 7 years. In other words, the cost of failure is the same whether you gamble and lose on big or small amounts, so the system incentivizes going big.
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Credit score. One’s ability to borrow is a function of one’s credit score, which is determined in large part by one’s history of debt payments. Having debt and making payments builds this history of credit worthiness.
So it really depends on one’s metric of success. Clearing debts could be worth it for the psychological benefits. It would feel good not to owe. But from a purely profit maximizing strategy, the game were in rewards carrying and servicing debt.
Saylor is a great example here. Microstrategy took on debt in the form of issuing corporate bonds in order to acquire and hold Bitcoin. He could have just bought Bitcoin with cash on hand and left it at that. But the legacy system incentivizes this debt-and-assets strategy.