Red states thinking of doing strategic Bitcoin reserve? Let them, it will be a democrat who cashes it out.

Recently, we've seen a rash of US states, and a few foreign nations supposedly toying with the idea of establishing a strategic Bitcoin reserve. Up to 11 US states, according to a recent report. Bitcoin advocates are selling an arms-race-just-about-to-be-triggered narrative: many states will be racing to get in, and then the few states who go in first will be very pleased with themselves in a few years, watching their stack appreciate.

We need to be very clear about the underlying math. At the risk of being pedantic, I state the obvious tautological theorem: Right now, and at any time in the past and future, the amount of money that will have been returned to sellers of Bitcoin is less then the amount of money that has been given up to purchase Bitcoin. This is a tautological fact that will always be true, regardless of the price. It will be true if Bitcoin goes to $17M or it it drops to $232.50.

Now it's tempting to look at many entities considering a strategic Bitcoin reserve, and say, "wow, if they all go all-in, then they will all have immense wealth, and my blue state, which cautiously stayed out of it, will be sitting here with no gains. If Texas buys $10 billion in Bitcoin today and the price does a 10X, they will have earned $90 Billion in Bitcoin!"

But I remind you, in the most patronizing and condescending math professor voice possible: they won't have made any money because they won't have cashed out. The fact that nobody has cashed out has a lot to do with why the number is so high. Texas won't have made a $90 Billion profit, they will have given up $10 Billion and probably owe interest on this.

Here's the thing: They will not cash out when they should.

You can't go from being a hodler to a profit-taker, without going from being a hodler to being a profit-taker

There's 4 categories of bitcoin holder that every entity falls into at a given point in time:

1) Stacking: Adding bitcoin monotonically, never spending

2) Cashing out: selling or spending bitcoin monotonically, never buying.

3)Never buying or selling.

4)Sporadically doing both, something buying, sometimes spending, sometimes taking as payment.

Most of us are category 3, steady with out balance at 0. Very few are category 4; while this is the normal thing people do with currencies, very few people treat Bitcoin like a currency. Aside from the few people who use Bitcoin as a currency, the only real inhabitants of category 4 are day traders. (Privately, it's likely that many Bitcoin hodlers are category 4, taking profits from time to time and jumping online to say that they just "bought the dip".) Bitcoin is not marketed as a currency, it's a thing that is sold as "If you do 1) for a while your number will be big."

So let's game this out. Suppose all these red states, and Czech Republic, Papa John's and the City of Miami and whoever, all decide they're category 1. Then certainly, the price goes up for a while, perhaps quite a bit, and all of these states, corporations and municipalities can parade around patting each other on the back for their financial prescience and great virtue.

Will Texas cash out? Will Florida cash out? They've all committed to being category 1, on the team, very virtuous. Switching to category 2 would be a massive party foul. If Florida started selling, suddenly the game is over. It will be clear that the era of number continually going up because everyone is stacking is over, and now it's everyone for themselves.

This is why the idea of the strategic reserve is so dumb: It precludes an exit strategy. Even it you've made a 10x profit on paper, you're still committed to stacking, until something drastically changes.

And here's the funny party. That thing that drastically changes, for some of these states, could be a blue takeover of the capital.

Ohio for example, has made a decisive right turn in the last few years with super-majorities in the general assembly. But they went for Obama and re-elected Sherrod Brown, a notably progressive senator, by a solid margin in 2018. Now suppose that Ohio decides to dump $300 million into Bitcoin this year. (Apparently they have a rainy day fund of $3.5 Billion, and the proposed bill would allow 10% to go into "digital assets," from my understanding. ) Then suppose, this sets off the God-chain that Bitcoiners dream of; Florida, Texas, North Dakota, more corporations, a few random nation-states, all follow suit. The price surges and the $300 million investment becomes a $3 Billion stack.

Will they start taking profits and invest in education? Maybe, but I don't think so. Unless, perhaps, they swing blue. A blue Ohio, without any ideological commitment or need to virtue signal by backing up their investment, can start to cash out their $3 billion, dumping it off of the other red states still committed to stacking to eternity. Texas will insist that Ohio is making a mistake by selling, but Ohio will be using the money on useful things like healthcare, education, etc, and probably won't care.