Thinking Fast and Slow on Bitcoin Pizza Day

Here we are again on May 22nd, the annual Bitcoin Pizza Day.

Fourteen years ago, programmer Laszlo Hanyecz bought two pizzas worth around 40 USD using 10,000 BTC. This story is so well-known that even people who aren’t interested in cryptocurrencies have heard it. Every year, the media recycles it, calculating how much 10,000 BTC is worth in today's dollars and how much each pizza cost. By updating these two figures, they turn it into a catchy "new" story.

Though not as extreme, I've had similar experiences to Bitcoin Pizza Day several times. One instance was on April 2, 2019, when I paid 130 HKD for dinner at IKEA using Bitcoin. Coincidentally, Bitcoin prices surged by 20% that day to 4,728 USD, and I "just" paid 0.00352481 BTC. With today's prices, that dinner cost me 1,926 HKD, making it the most expensive meal of my life.

Whether it's Bitcoin Pizza Day or my personal experiences, the common media angle is, "Haha, spending that much money on a meal or two pizzas is ridiculous! Should have paid in dollars and saved the Bitcoin." This reaction is natural but also the least insightful and most unlearned.

Think about it. I spent 0.00352481 BTC on a meal because I happened to have some Bitcoin change I wanted to use up? As for Hanyecz, a person who understood Bitcoin well enough in 2010 to easily spend 10,000 BTC on two pizzas, is it likely that he only had 10,000 BTC?

Clearly not. Spending Bitcoin primarily means having enough Bitcoin on hand. Simply Hanyecz’s gas fee for transferring 10,000 BTC was a whopping 0.99 BTC. In a 60 Minutes interview, he even mentioned that after Bitcoin Pizza Day, he continued to buy pizzas and other items with Bitcoin, spending about 100,000 BTC in total. Even if he were "all in" and whimsically decided to spend 99% of his Bitcoin on pizza in one go, he would still have over 100 BTC left after the transaction. I can't say he definitely has more Bitcoin than you, but I certainly can't compare. If you haven't saved up 100 BTC yet, it’s not wise to mock Hanyecz.

Mainstream media often protray Bitcoin Pizza Day as a story of someone "naively spending" their money, which is problematic as it amplifies a single transaction while ignoring the fact that asset allocation is a holistic process. Everyone handles multiple transactions every day, and each transaction is just a small step in their overall asset allocation strategy.

Let's bring in our old friends Alice, Bob and Carol to simulate real-life asset allocation decisions.

For ease of calculation, let's assume Bitcoin's current price is 60,000 USD, and in four years, it will be 100,000 USD. I believe this is a conservative estimate, but if you think I'm overly optimistic, we'll just have to revisit this article in four years and check the actual numbers. Also, for easy comparison, let's assume today Alice, Bob, and others each have assets worth 600,000 USD and need 60,000 USD annually for living expenses.

First, let's look at Alice, who is USD-based. Since the SEC approved the listing of Bitcoin spot ETFs, Alice has taken an interest in Bitcoin and converted 10% of her assets into Bitcoin, holding 540,000 USD and 1 BTC. Alice uses USD for daily expenses. By 2028, she will have spent 240,000 USD (60,000 x 4) and still hold 300,000 USD and 1 BTC, equating to 400,000 USD or 4 BTC.

On the other hand, Bitcoin-based Bob holds assets worth 600,000 USD in 10 BTC. Since he holds only Bitcoin and most merchants only accept dollars, Bob always converts Bitcoin into dollars for consumption. Over the next few years, Bitcoin's price fluctuates, sometimes falling below 60,000 USD and sometimes rising above 60,000 USD. On average, Bob spends 4 BTC over four years. By 2028, Bob holds 6 BTC, worth 600,000 USD. From a dollar perspective, it seems he hasn't spent any money in four years.

Meanwhile, Carol, Dave and Eve are Bitcoin onlookers who advocate "not investing". In 2028, their conversations revolve around the 2026 Bitcoin bear market, where the price dropped to 25,000 USD. On that day, Bob spent 0.001 BTC on a 25 USD dinner, equivalent to 100 USD in 2028.

The above examples are undoubtedly rough and do not consider interest on dollar deposits. I’m not advocating for readers to go all in on Bitcoin like Bob but simply show the type of asset you hold matters. It’s not wise to scrutinize the most extreme single transaction, but look for the overall asset allocation strategy in view of a longer timeline.

Unless you completely avoid consumption, you must choose your asset type for daily expenses. Every day is "Bitcoin Pizza Day". If you think paying entirely in USD avoids the pain, consider this: if all your idle assets are in USD, you're choosing a continuously depreciating asset over a continuously appreciating one, just like Hanyecz did when he bought the pizza. In other words, you are the Bitcoin Pizza Day victim; and you just haven't realized it.

In his book Thinking Fast and Slow, Nobel Prize-winning economist Daniel Kahneman, who passed away on March 24, 2024, explained that we mostly rely on intuition for our decisions using the effortless System 1, the "fast thinking", and only occasionally summon the rational but mentally taxing System 2, the "slow thinking". This framework fits perfectly with the concepts of spending and saving.

Most people with monthly salaries only need to consider where to allocate their remaining assets once a month, or choose "not to invest" and simply save the asset in which they are paid, typically fiat currency. Conversely, people make multiple spending decisions daily and theoretically need to decide which asset to use for payment each time. In reality, nobody meticulously ponders what asset to use for every single transaction. Instead, they rely on intuitive "fast thinking" to lock onto one type of asset for all their spending. Conversely, deciding which asset to save is an occasional but significant decision that deserves "slow thinking" and careful consideration.

Applying the fast and slow thinking framework to Alice and Bob's asset allocation decisions reveals the following:

• USD-based Alice uses "slow thinking" to mainly save in dollars and buy a small amount of Bitcoin. In her daily life, she uses "fast thinking" to pay with USD, avoiding significant losses on single Bitcoin transactions.

•  Bitcoin-based Bob uses "slow thinking" to go all-in on Bitcoin. In his daily life, he uses "fast thinking" to pay with Bitcoin. As a result, some of his Bitcoin transactions, in hindsight, appear to be big mistakes.

However, even though Bob makes multiple "mistakes" by using Bitcoin for payments, his key decision to save his remaining assets in Bitcoin turns out to be the right move in the long run. His assets far exceed those of Alice, who primarily holds USD. Between USD-holding Alice, Bitcoin-holding Bob and the general public who laugh at Bitcoin Pizza Day annually, which is the more rational choice? And which one are you?

Bitcoin Pizza Day isn't just about Hanyecz; we're all part of this story because, on May 22, 2010, everyone chose USD over Bitcoin. Bitcoin Pizza Day isn’t just an annual event on May 22; it happens every day around the world. Every day that we have 40 USD in idle assets without converting it to Bitcoin, we become the main character of the day.