Simply put, a forced seller in bitcoin is someone selling bitcoin when they don't want to. They are forced to sell either by the mechanical function of the contract they are in, or they are forced to sell in order to pay for some other type of obligation.
There's nothing wrong with selling bitcoin. Many LARPing bitcoiners on Twitter will proclaim that they'll never sell and their bitcoin is for the citadel… bla bla bla… but you never know what people are doing behind the scenes. People buy and sell bitcoin all the time, and you don't have to be one of these guys who loudly posts IM NEVER SELLING because when push comes to shove, everyone has a price.
Point is – nothing wrong with selling. As long as you choose to sell.
What really sucks is when you have to sell even though you don't want to, and that makes you a forced seller.
I talk about being a forced seller from time to time on the blog here because not only have I been a forced seller in the past, I've read many stories about people losing a majority of their bitcoin stack playing silly games trying to get rich, and I want to help you avoid doing that.
3 Ways To Become A Forced Seller Of Your Bitcoin
1. Taking Out A BTC-Backed Loan
For a while there in the 2020 bull market, there was a lot of talk about taking about bitcoin backed loans to double down on bitcoin or buy other assets with loaned money so that you could acquire hard assets with the worthless fiat. The idea (which is a sound idea) the higher rate of inflation wipes out the value of your debt, so it becomes easier to pay back with new, more widely available fiat currency.
When people take out 30 year loans to buy a house, the fixed payment remains the same, and they gradually earn more income over time due to inflation. In 30 years, although the fixed dollar amount of the payment is the same, the actual percentage of your paycheck is shrinking.
The trouble with bitcoin is that the value of your asset gets “marked to market”, and you can get margin called. With a house, you can be under water on the loan and still keep the house as long as you can keep up with the payments. With bitcoin, when the value of bitcoin goes down, you need more bitcoin to prevent yourself from getting liquidated.
The the crash took everyone by surprise, and suddenly anyone who took on a bitcoin-backed loan at $60k was struggling to meet their loan-to-value obligations as we plummeted down to $20k.
When you take out a bitcoin-backed loan, you are required to maintain a certain amount of bitcoin collateral based on the amount of fiat you took out. A common LTV ration is 40%-50%, meaning the value of your loan cannot be greater than 40% of the collateral you posted. If you posted $1000 worth of bitcoin collateral, you can take out $400 worth of USD because $400 is 40% of $1000.
This can be a great way to acquire non-taxable money in many jurisdictions around the world because it's not income, and it's not profit. You're borrowing money, so it's a loan. Of course, you still have to pay back the loan at some point, but you can pay that back with your actual income, plus you probably even get to write off the interest expense. Alternatively, you can simply wait for the price of bitcoin to rise, and then cash out some bitcoin at a higher value, and pay for the loan with your profits.
If everything works out in your favor, you'll get free money and more bitcoin.
Trouble arises when things don't move in your favor.
If the price of bitcoin goes down, you need to top up your collateral to maintain the ratio. If the price drops 30%, the $1000 worth of bitcoin collateral is now worth just $700, and your USD loan is still worth $400. That's a 60% LTV ratio. You need to top up another $300 worth of bitcoin or pay back some cash to maintain the LTV.
The trend of excessive buying on the way up and cascading liquidations on the way down happens every cycle. Greed and fear are just how humans operate. Everyone gets exuberant in the bull market, buys as much bitcoin as possible, and then in a sudden downturn of the market they get caught with their pants down and have loans obligations they can't service.
Unless you are a financial wizard, or take out loans so small that you'll have enough bitcoin to cover your collateral obligations in the event of a 95% drawdown, then the best strategy is to simply not take on a loan. Trying to double your bitcoin stack in a volatile market based on Twitter advice is a recipe for disaster.
2. Not Having Enough Cash For Expenses
There's a growing movement of bitcoiners who are beating the drum of get on zero, which is a play on the phrase get off zero, which is often used to motivate nocoiners to get some skin in the game and buy their first bitcoin. The meaning of get on zero however was to have $0 fiat in your accounts. In other words you would be 100% in bitcoin!
This was quite popular on Twitter for a while, until the market started to falter, and then people began to figure out that having some cash to pay for expenses is a decent short term hedge against the volatility of bitcoin.
Of course, some people still make the case that if you own bitcoin purely for ideological reasons, then there's nothing wrong with taking a loss on some of your bitcoin buys. The point of using bitcoin as money is to spend bitcoin for everyday expenses, and not worry about whether each trade is profitable, let alone if bitcoin is making you wealthy. It all comes out in the wash if you have cash flow are consistent enough about buying during all types of markets.
If you are like myself, and most likely the majority of people out there, you like to separate your savings from your spending accounts for simplicity: spend fiat, save bitcoin. It just makes it easier to stay solvent and rational during deep bear markets.
I speak from experience when I say that it's easy to get caught up in the FOMO of a bull market, and unfortunately, in 2021 I ended up with some very large, unexpected expenses. $1500 for a water heater. $6000 for interior/exterior paint. $2500 for windows. 3 months of rental income no longer coming in. Plus a large April tax bill was on the horizon!
After all was said and done, I had to take on a massive pile of (traditional) debt via credit cards to get everything paid for, and rather than have that hanging over my head, I sold some bitcoin to pay everything off rather than have that debt burden hang over my head for yet another year. I wasn't happy about having to sell some bitcoin, but looking back at everything, I have to take ownership of my greed during the bull run and try to learn from my mistakes.
3. Playing The Futures Market
I'll be honest, I don't play in the bitcoin futures markets markets, so I can only describe what's going on in a broad way. Basically, with futures, you make bets that the price of bitcoin is moving in a specific direction, either up or down, and you get paid if you're right. Futures are a way to hedge the risk of your core bitcoin position, since you can buy futures that moves opposite of how your portfolio is constructed. For example, if you own a lot of bitcoin, you can short bitcoin in the futures market, so if bitcoin unexpectedly tanks, although your core position is worth less, you still earned money on the short futures contract. It works in the opposite direction too.
However, many people don't use futures as a rational portfolio construction strategy. The folks who are are lovingly known as degens, or degenerate traders, use futures as a way to buy leveraged positions and either get rich or get wiped out. Bitcoin's volatile price movements can take a relatively small futures contract and cause it to explode in value in a very short period of time if the market moves in your favor.
Or, you can get liquidated and lose everything.
Many people use futures as a way to “catch up” if they feel they missed a specific bull market, and the results are not pretty. Lots of people lose a lot of money trading in the bitcoin futures markets. You are contractually obligated to follow the terms of the contract, and if the market moves against you, your bitcoin gets liquidated, and you become a forced seller.
What About Living On Bitcoin?
Forced seller implies that you don't intend to sell. If you are living on bitcoin, as more and more people are, then you will have to sell bitcoin to pay for food, rent, and leisure. That's just how money works. You get paid to work, then you pay other people to work for you.
I think the difference here is that selling bitcoin is part of the plan. If the plan is to sell, then you aren't a forced seller. You're just using using bitcoin.
One interesting perspective I heard from someone who was living on bitcoin is that owning any dollars is a form of market timing, because you're always hedging your bitcoin with dollars. Dollar ownership is, in a sense, a short bitcoin position. You're hoping to buy the dip, instead of maxing out your bitcoin position as soon as possible.
I don't really subscribe to that philosophy, or at least I don't think I'd enjoy being in that kind of financial situation, but I understand the perspective. Something like that may work for other people, but I prefer the save in bitcoin, spend in fiat lifestyle.