The “Wealth Effect” is holding down the price of bitcoin

The wealth effect is holding down the price of Bitcoin and the fun begins as soon as OGs uh run out of Bitcoin to sell or they run out of things they want to to buy with Bitcoin they're selling. So, let's unpack all of that. Okay, first of all, what is the wealth effect? The wealth effect is a universal phenomenon that happens to humans when assets they own rise quickly over time or ultimately become a lot more valuable than they originally anticipated. So this happens when you get a raise. This happens when the price of your h houses in your neighborhood goes up by 50%. And this happens if you're holding Bitcoin that you bought for a dollar or $100 or $1,000 that's now worth $100,000. What happens is the wealth effect kicks in. The wealth effect makes you willing to spend money you otherwise would not have been willing to spend because you feel wealthy. That's why it's called the wealth effect. The wealth effect can take uh anywhere from months to years to wear off. In the world of Bitcoin, it seems to take between six and eight months for the wealth effect to wear off after Bitcoin has re reached a new price uh or a new general price level. Let me tell you how that works. Okay, so uh let's use $10,000 because the exact same thing happened at $10,000. So, Bitcoin runs up to $10,000 and people who have been holding Bitcoin for a long time that they bought for a dollar or $10 or $100 start feeling wealthy. uh wealth effect kicks in. So what do they do? Well, there's things they wanted to do for a long time that they just now have the opportunity to do. So they build a add-on to their house. They pay off their credit card debt. They buy a new car. They do all of the things people do when they are feeling wealthy. Uh and then you know they calm down a while and Bitcoin bounces around. But because of one second, but because of all of that sell pressure from the wealth effect, uh the price goes under $100,000 or sorry, $10,000. Well, then the price because of demand because there's this everpresent demand buying up Bitcoin as the world adopts Bitcoin. It pushes the price above $10,000. And again, psychologically, there's a lot of people that have hundred, you know, $10,000 stuck in their head. And so they're like, "Oh, okay. Well, I guess I'm still even feeling wealthier because now not only did we spend a little bit of time above $10,000, we actually spent more time above $10,000. That means this rest of this all of this Bitcoin that I own is worth even more than I thought it was because I thought we might spike above $10,000 once and that was it. And then now we're holding above $10,000. Maybe I can afford a nice ski vacation or a trip to the Caribbean or whatever it is that you know people do. once again as a result of the wealth effect. So the more times Bitcoin goes above $10,000, the more times it triggers the wealth effect by people who are thinking, you know, now's a good time to go, you know, do something nice for themselves and their families, which is great. One day you will be that person. One day you will be up 10x on your Bitcoin and you will be the person who decides that it's time to do something nice for yourself and your family based on your Bitcoin holdings. But again, a lot of those people, they did that and that's why it took quite a while to definitively clear $10,000. The same thing happened above $50,000. We spent literally 8 months, 8 months in 2024 between $55,000 and $70,000. And you know, $50,000 was a psychological level for a lot of people. And once we got definitively above that, it triggered the wealth effect pretty profoundly for a lot of people. And uh so it took 8 months to sort of officially kiss $50,000 goodbye and you know sail toward $100,000. It just took a long time. Well, we first crossed $100,000. I forget when it was late last year, early this year, something like that. Obviously, that triggers the wealth effect for a whole bunch more people because psychologically $100,000 is a very big number. And there's a lot of people who have been sitting on Bitcoin a long time that, you know, are up 10, you know, even at $100,000, if you bought at $10,000, you are now up 10x on your investment. One second. So, every time we go above $100,000 and then every time we stay above $100,000, there are Bitcoin OGs who think, "Wow, we're up here above $100,000 for a nice long time. That means this huge stack of Bitcoin I'm sitting on is worth a ton of money. And if we're going to consistently stay here above $100,000, they get more and more confident with the total wealth of their Bitcoin the longer they stay above $100,000. You see, if you only spike above $100,000 once, and it's not clear if it's going to hold, like maybe late last year or early this year, then OG Bitcoiners are only willing to sell a tiny little bit of their stack because they're thinking, "Hey, maybe maybe the rest of my stack's going to drop back to $50,000." Um, but the longer you hold, the more comfortable people get with, wow, you know, I am really wealthy up here above $100,000. And so again, the longer it holds, the longer people are willing to spend money uh up above that level. So why does the price always eventually go up anyway? Well, the answer is because one of two things happens. Either people run out of things that they want at these price levels or they run out of Bitcoin that they're willing to sell at these price levels. If you think about somebody that wins the lottery, the lottery triggers the wealth effect in a very profound way. Um, so somebody wins the lottery. What usually happens? The answer is they run out of money. Well, how do you run out of money if you win the lottery? And the answer is because it, you know, you're paying 40% taxes on that money when you win the lottery. And, uh, you know, they burn through the money really quick. And usually they end up completely broke and bankrupt. The average lottery winner ends up completely broke, bankrupt, totally out of money. Like that's what usually happens to lottery winners. Um, so they usually don't run out of things they want. They usually just run out of like straight up legit run out of money. Um, but for the wealth effect, most of the time, hold on. I am directly in the sun. The sun is literally behind the turning signal, and I cannot for the life of me tell if I'm allowed to turn or not. Like the sun, I've never had the sun be perfectly behind a a turning signal where you can't like you totally can't even see it. Um, you know what? I'm not even going to try to turn. I'm just going to go straight because literally it is completely impossible to see that turning signal. The sun is like smack behind the turning signal. Anyway, um all right, I took a different route. Uh sorry about that. Um okay, so uh so lottery winners tend to to run out of money. uh people who feel wealthy as a result of the price of their, you know, the real estate in their neighborhood going up or their stock portfolio going up, those people tend to not run out of money. They run out of things they're willing to buy at the wealth. So the wealth effect wears off over time. It also wears off as you buy stuff. So you know, the price holds above $100,000 for, you know, 8 monthsish, something like that. Um and people start one they start getting accustomed to that of you know to that level of wealth. So the wealth effect wears off over time but the wealth effect also wears off as you buy stuff because as you buy stuff the total amount of money that's giving you the wealth effect goes down. So you know if somebody's sitting on you know a ton of Bitcoin you know let's say somebody is sitting on you've got an OG who's sitting on 10 Bitcoin or 100 Bitcoin. Well, if they go spend, if they got 10 Bitcoin and they spend one of those Bitcoin, now they feel 10% less wealthy. And so, whatever it is that they were feeling wealthy, now they're 10% less wealthy, which means the wealth effect drops. And it doesn't take spending money on much for the wealth effect to have a pretty profound drop to suddenly feel like, hey, I have a ton of money to, oo, I actually don't really have that much anymore. Um, so anyway, so one of two things will happen. Either OG's will run out of Bitcoin, which is unlikely. They're not going to like sell all their Bitcoin. OG's don't just sell all their Bitcoin. But what will happen is they will either get comfortable with the fact that they are now, you know, their assets are worth more than $100,000 and then the amount of wealth they have feels normal and or they will finish buying whatever it is they wanted to buy which will reduce the amount of wealth they have which again you know reduces the wealth effect or it just satisfies them at that level. Now, even though I am not a Bitcoin OG, I bought my first Bitcoin in 2017 at the very end of 2017. And my average cost basis for all the Bitcoin I own is probably around $35,000, which is totally not OG level Bitcoin. I don't have any $100,000 Bitcoin. The cheapest Bitcoin I ever bought was $6,400 in 2018. So, I am not a Bitcoin OG. One second. But even though I'm not a Bitcoin OG, I do feel the wealth effects at different price levels. So, for example, you know, when the price went to $50,000, I bought a few things that I would not have bought for myself and my family when the price was $10,000. When the price hit $100,000, I bought a few things for myself and my family that I would not have bought otherwise. For example, even though I financed the 2026 Tesla Model Y that I normally drive, my wife is driving it right now, which is why I'm driving a Honda Pilot, which was what she usually drives. Um, but uh I felt comfortable buying that Tesla and financing it because Bitcoin was consistently above $100,000. Now, it had dipped to $85,000 at the time I bought it, but but Bitcoin had spent enough time above $100,000 that I was comfortable that I owned a $100,000 plus asset. If the price of Bitcoin was bouncing around above 50,000, I would not have bought that car. So, but again, it only took buying that Tesla and, you know, a few small things and then I feel like, wow, I don't really have the wealth effect anymore. Now, I feel like kind of I was where I was now. Technically, my net worth is way higher. uh you know, my my my total Bitcoin stash appreciated in value far in excess of just the price of one Tesla. But it only takes buying a Tesla for me to one feel like, okay, you know, there's a lot less that I want now, and two that um that okay, you know, I've you know, I'm have, you know, materially less Bitcoin. So, not by a large percentage, but you know, some less. So those two effects mean after I buy a Tesla, you know, with the price at $85,000, but it had been above $100,000. When I buy a Tesla, the wealth effect significantly reduces for somebody like me. So I know what that feels like. Even though I'm not a Bitcoin OG, my likelihood to spend Bitcoin dropped significantly after I bought that Tesla versus before I bought that Tesla. And if I had liquidated Bitcoin to buy the Tesla instead of finance it, obviously that would have applied selling pressure to the marketplace. So right now the the reason the price of Bitcoin is not going up faster is because of the wealth effect. It's there's too many OGs still selling too much Bitcoin right now. And so even though all of that is being eaten up by demand, it's not being eaten up fast enough to eliminate, you know, to allow the price to rise, which is why we're stuck here at $111,000 and it feels like we've been in this general range for way too long. Uh so anyway, wealth effect is temporary. Wealth effect with all humans is temporary. It will absolutely wear off and the price will absolutely go up when it does. And that is just how all markets work. not unique to Bitcoin. That is just how all markets work. Uh so fun times are ahead. The OGs will eventually get tired of buying new stuff or they will start running low on coins they're willing to part with and the price inevitably has to go up. Have a great day everyone.