Should You Spend Your Bitcoin?

Over the last few years, Bitcoin has exploded in popularity as a new asset. It is being bought up by massive corporations and incorporated into new products by the world's biggest banks. But in terms of Bitcoin's mass adoption, many believe we are just getting started.

Using Bitcoin as a method of payment is beginning to catch on with retailers, normalizing its use at point-of-sale. But is it a good idea to spend your Bitcoin? What are the advantages and disadvantages of using your BTC for everyday purchases? Read on...

Bitcoin as a Medium of Exchange

Over the last decade, Bitcoin managed to secure its place as a store of value. Born in the aftermath of the 2008 global financial crisis, Bitcoin's founders sought to create a new kind of money, independent of what they viewed as untrustworthy banks bailed out by unreliable governments. 

Bitcoin fulfilled its role as a safe store of value during 2020's COVID-19 crisis. As the United States central bank printed trillions of new dollars for economic relief, many realized that 1 USD in 2021 will not equal 1 USD in 2050. Unlike the US Dollar, Bitcoin was designed with scarcity in mind. There will only ever be 21 million BTC in existence, which means that so long as people continue to mine and collect Bitcoin, it will grow in value. 

The second phase in Bitcoin's journey to mass adoption centers around its use for transactions. Using BTC for purchases is beginning to become more popular, especially in countries like El Salvador where it's legal tender. But is Bitcoin really a great cash substitute?

Consider these three pros and cons before buying with Bitcoin.

Pros of Spending Bitcoin

1. Privacy 

Bitcoin purchases are discreet. Your purchase cannot be easily tracked by a bank or other prying eyes so long as your wallet address isn't exposed. However, if your wallet is linked to your identity, anybody can see your entire transaction history on the blockchain - but unlike a credit card statement, the details of what you bought or sold remains confidential. Learn more about Bitcoin privacy here.

2. Increased Purchasing Power

Bitcoin's steadily increasing value means that you will be able to buy more goods with 1 BTC over time than you would with $1. Bitcoin is deflationary, meaning that its value increases over time while the USD is inflationary - losing value over time. This makes Bitcoin a great asset for local purchases, as the increasing value of 1 BTC transfers around your community and grows the wealth of everybody who holds it.

3. Be Your Own Bank

One of Bitcoin's most significant benefits is that it allows you to maintain your wealth on your own terms. You control how you spend your money without any oversight from banks or governments. 

Cons of Spending Bitcoin

1. High Transaction Fees at Peak Times

Bitcoin's average transaction fees are known to spike at inconvenient times. During the 2024 bull run that saw a new All-Time-High, the average transaction fee skyrocketed to over $100. Even during calm times it can still cost a few dollars for modest transactions.  

2. Your Purchase Could End Up Costing More Than It's Worth

Historically, it's been more profitable to hang on to any Bitcoin you have than to let them go. You don't want to end up like Laszlo Hanyecz, who used 10,000 BTC to pay for two Papa John's pizzas in 2010. If he had just held on, Mr. Hanyecz would be able to buy everybody in the USA a pizza. 

3. Taxes

Any time you sell your Bitcoin for something else, you must record your losses or gains and report them to the United States Internal Revenue Service. On Tax Form 1040, the IRS asks whether you have ever received, sold, sent, exchanged, or otherwise acquired any cryptocurrency. This means that every bitcoin transaction must be recorded, and additional tax payments may be required. 

Final Thoughts 

As Bitcoin's price continues to increase drastically, its use-case as an asset class may be outshining its ability to make payments. Due to Bitcoin's ability to hedge against inflation and its price volatility, you may want to consider using other cryptocurrencies to make purchases. Coins like Ether, Litecoin, and others may be stable in value and allow for faster and cheaper transactions than Bitcoin.