How Bitcoin Lowers Time Preference and Interest Rates
One of the most powerful effects of Bitcoin is how it changes the way people think about money and the future. Unlike traditional fiat currencies, Bitcoin encourages saving instead of spending, which has a direct impact on time preference and interest rates. But how does this work mathematically? Let's break it down in the simplest way possible.
What Is Time Preference?
Time preference refers to how much we value present goods compared to future goods. If someone prefers to spend money now rather than save it for the future, they have a high time preference. If they are willing to wait and save for better rewards later, they have a low time preference.
Formula for Time Preference
A basic way to express time preference mathematically is:
where:
- TP = Time preference ratio
- PV = Present Value (what something is worth today)
- FV = Future Value (what something will be worth in the future)
If TP is high, people value the present more and spend instead of saving. If TP is low, people value the future more and prefer to save and invest.
How Interest Rates Reflect Time Preference
Interest rates are a measure of how much extra people demand to delay consumption. The formula that connects present and future value through interest rates is:
Solving for r (interest rate):
where:
- r = Interest rate
- t = Time (years, months, etc.)
When people have a high time preference, they demand higher interest rates to delay consumption. When they have a low time preference, interest rates naturally decrease because more people are saving, increasing the available capital for lending.
Bitcoin’s Effect on Time Preference
Bitcoin has a unique property: its total supply is fixed at 21 million coins. This makes it different from fiat money, which can be printed indefinitely, reducing its value over time. Because Bitcoin’s supply is predictable, people expect its value to increase in the future.
This expectation affects time preference in the following way:
where:
- FV_B = Future value of Bitcoin
- PV_B = Present value of Bitcoin
- g = Growth rate of Bitcoin’s value
Since Bitcoin's value is expected to grow, FV_B increases, making TP_B (Bitcoin time preference) lower:
If Bitcoin’s value grows significantly over time, TP_B moves closer to zero, meaning people strongly prefer saving over spending. As people trust that Bitcoin's price will rise, they become less inclined to spend it on things they don’t truly need, opting instead to save and invest for the future.
How Bitcoin Affects Interest Rates
Since people expect Bitcoin to hold or increase in value, they are less likely to spend it today. This means they are more willing to lend Bitcoin in the future, increasing the amount of savings in the economy. More savings naturally lead to lower interest rates because there is more capital available for lending.
Under a Bitcoin-based economy, the interest rate would be determined by real savings rather than central bank manipulation. The formula for Bitcoin’s interest rate would be:
Because FV_B is expected to grow, r_B (Bitcoin’s natural interest rate) tends to decrease over time. This means:
- More people save rather than borrow.
- Investments are based on real savings, not artificially created money.
- The economy becomes more stable, avoiding bubbles caused by excessive debt.
Conclusion
Bitcoin fundamentally changes how people view money and the future. By having a fixed supply and increasing in value over time, it reduces time preference, encouraging saving instead of immediate consumption. This leads to lower natural interest rates, since more real savings are available in the economy.
In simple terms:
- Fiat money encourages spending and debt.
- Bitcoin encourages saving and long-term thinking.
- Lower time preference means lower, more natural interest rates.
Bitcoin is more than just a currency—it’s a system that rewires our relationship with money, making us think further into the future. This shift could have massive economic consequences over time, leading to a more savings-driven, stable economy.
