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Difference between saving and investing
I can see that Austrian economics and Saifedean are very big on saving. And I’ve many times comes across a reference to how saving is capital accumulation to invest in ‘better means of production’ – which will overall increase the productivity of a society.
However, saving and investing are different, right? The Bitcoin example is the best one – given its status as hard money, people are hoarding and hodling bitcoin. How does this in any way lead to investment or bettering our means of production? What am I missing here..
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2 Replies
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You have a good point, Parmeet. The difference is kind of murky.
I guess saving, as in hodling bitcoin, does not lead to growth in any business. We hope bitcoin’s value will go up, but that isn’t investing.
The alternative is to, say, buy a stock in a company. You’re lending money to the company to improve their factories or whatever. Hopefully, this leads to an increase of the company’s value, and even more we hope that for every dollar the company spends on upgrades causes the company value to increase by more than 1 dollar, which is a good investment. But if the company just pisses the money away and its value doesn’t change (or goes down), then its a bad investment.
The third case is when you save money by letting some institution (bank) take care of it on your behalf. Then the bank invests your money, and any loss or reward from investing belongs only to the bank, so you aren’t participating. You save, they invest. If the bank pays you interest, then you get an indirect benefit from the investing. That seems to be a situation about halfway between investing and saving.
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Savings, like you said, is the accumulation of capital. Investment involves either the liquidation or the leverage of capital in the attempt to return more capital at some point in the future.
Because of the nascent nature of bitcoin, it is itself viewed as an investment. You would liquidate your savings (USD or your fiat of choice) or perhaps leverage another asset into USD to purchase bitcoin.
At some point in the future, when the volatility of bitcoin has settled to such an extent that it is a more stable store of value, it would then be more prudent to liquidate (or leverage) your bitcoin in order to return more at some future date. As of today, you would be hard pressed to find an asset that is going to outperform bitcoin in the medium to long term, so liquidating your bitcoin in order to invest that money elsewhere is likely going to be a bad investment. However, there is the caveat that since bitcoin does not produce a cash flow, liquidating your bitcoin to buy an income producing asset might be a reasonable choice to avoid having to consistently sell bitcoin to cover expenses.
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