"Get on zero" has emerged as a powerful mantra among bitcoiners, urging people to convert their entire wealth into bitcoin. However, this approach overlooks a fundamental challenge: fiat-denominated liabilities still exist on our balance sheets.

This article explores the asset mismatch problem that arises from striving for "zero fiat." It explains why such a strategy is irresponsible and counter to Bitcoin's founding ethos, as it ultimately replicates 0% reserve banking at the individual level.

The Asset Mismatch Challenge

To get on zero fiat, individuals convert all of their wealth into bitcoin and either pay their bills directly in bitcoin or convert their bitcoin to fiat currencies when their liabilities are due. The idea is that it is financially more profitable and accelerates adoption since we expect bitcoin will ultimately appreciate against fiat currencies as it has done in the past.

The challenge with this approach is that it ignores that most people have liabilities denominated in their local fiat currency, such as taxes, housing costs, and other living expenses. In other words, getting on zero fiat is impossible because we all have liabilities denominated in fiat. For a bitcoiner "on zero," this creates a balance sheet with mismatched assets and liabilities whose units of account are wildly volatile vs. each other.

The Risks of Asset Mismatch

This asset mismatch poses a significant risk due to the short-term volatility of bitcoin's price compared to fiat currencies. In times of unfavorable exchange rates or sudden price drops, bitcoiners on zero fiat may face difficulty meeting their fiat-denominated liabilities. These situations can lead to the forced liquidation of their bitcoin holdings, potentially at a loss, and even result in insolvency.

Determining the Appropriate Amount of Fiat Holdings

To mitigate the risks associated with asset mismatch, individuals should determine how much fiat currency they need to cover their near-term liabilities. A general rule of thumb is to hold enough fiat assets to cover at least six months to two years of anticipated expenses, depending on individual circumstances and risk tolerance.

Factors to consider when deciding on the appropriate amount of fiat holdings include:

• Stability of income: Those with stable and predictable income sources may feel comfortable holding a smaller fiat reserve, while those with irregular income may benefit from a larger safety net.
• Access to credit: Individuals with access to credit or other financial resources may require a smaller fiat reserve, as they can tap into these sources if needed.
• Personal risk tolerance: Some individuals may have bigger stacks and be more comfortable with the risks of near-term asset mismatches. In contrast, others may prefer a more conservative approach to protect their nest egg.

Example Scenarios

Consider an individual who has decided to hold 12 months' living expenses in fiat currency based on their circumstances and risk tolerance.

Their balance sheet might look like this:

Assets:

• Bitcoin: 6.15 BTC
• USD Savings: $50,000

Liabilities (annual):

• Rent/mortgage (USD): $30,000
• Groceries (USD): $6,000
• Utilities (USD): $3,000
• Taxes (USD): $12,000
• Total liabilities (USD): $51,000

In this scenario, the individual has allocated a portion of their wealth to fiat currency, allowing them to cover their anticipated liabilities for the next 12 months. If they have income in the meantime, they can first use it to pay for the expenses while retaining their 12-month buffer and stack sats with any income above their expenses. This approach provides a buffer against short-term market volatility and ensures they can meet their financial obligations without liquidating their bitcoin holdings.

Now consider another individual with higher risk tolerance and access to credit might decide to hold only six months' worth of living expenses in fiat currency.

Their balance sheet might look like this:

Assets:

• Bitcoin: 8.15 BTC
• USD Savings: $25,000

Liabilities (annual):

• Rent/mortgage (USD): $30,000
• Groceries (USD): $6,000
• Utilities (USD): $3,000
• Taxes (USD): $12,000
• Total liabilities (USD): $51,000

In this case, the individual has chosen to allocate a smaller portion of their wealth to fiat currency based on their personal risk tolerance and access to credit. While this approach may expose them to greater short-term risk, they may have determined that they are comfortable with this level of exposure.

If bitcoin's price appreciates during that year, the individual holding more fiat will lose out on additional bitcoin they could have stacked. Conversely, if the individual lost their income, didn't have access to cheap credit, and bitcoin's price cratered to new lows, they would risk losing most if not all of their stack over a short time.

Recall the shock to bitcoin's price during March 2020, corresponding to when many people lost their jobs. With bitcoin's price at $3,000, the second individual would have needed their $25,000 and all 8.15 BTC to cover their annual expenses. In contrast, the first individual would have retained their 6.15 BTC as the market played out throughout that year and later in the bull market.

The Fractional Reserve Problem

Ironically, "getting on zero" replicates a mistake by fractionally-reserved banks: holding insufficient reserves to cover their liabilities. Fractional reserve banks maintain only a fraction of their depositors' funds in reserve, lending the rest out. This system works as long as depositors do not simultaneously withdraw their funds.

However, in times of crisis, such as a bank run, these banks can face insolvency due to insufficient reserves. For more on full reserve banking for fiat and bitcoin banks, please see We Need Sound Banking and I Like Bitcoin, Buy My Fractionally-Reserved Bitcoin.

Similarly, individuals who "get on zero" by holding all their wealth in bitcoin may find themselves in a precarious situation when they need to meet their fiat-denominated liabilities, especially during periods of market volatility. By holding an insufficient fiat currency reserve, they expose themselves to the risk of forced liquidation of their bitcoin holdings.

Conclusion

In conclusion, while "getting on zero" may seem appealing, it is ultimately a myth that can lead to financial instability due to the unavoidable presence of fiat-denominated liabilities. By acknowledging this reality and thoughtfully managing near-term liabilities with fiat assets, bitcoiners can mitigate the risks associated with asset mismatch while utilizing bitcoin as their long-term savings vehicle.

The privilege of living through the monetization of bitcoin and the transition of the global monetary system requires bitcoiners to make prudent decisions regarding their assets and effectively manage their finances as we inevitably encounter road bumps in bitcoin's adoption path.

Stay humble, stack sats, and match your assets to your liabilities.