If a U.S. State Actually Held Bitcoin, would it be Progress or Suicide?

[mv1986]

The point against holding Bitcoin instead of spending makes no economic sense because increasing adoption of a network with a fixed unit supply automatically leads to the network value to increase. When something increases in value, or put differently, is expected to further increase in value over time, holding is the preferred action to take.

in an extreme case it does. If everybody or majority chooses to hold Bitcoin rather than spend it, it would affect the returns of miners and many wouldn't be able to to keep up.
And we know how that would pan out for Bitcoin.

Your set of assumptions falls short of grasping the full complexity of "skin in the game" in the Bitcoin network. What I described is not an extreme case, it is standard economics. But that principle doesn't imply "everybody" will hold, it implies that more Bitcoin will be held or bought than sold. it is not like transactions would dump to zero. But assuming transactions drop drastically and along with that miner rewards, then you will either see mining operations shift to places where energy is less expensive, or hash rate to drop, network security to drop and now price expectations will adjust and more people decide to liquidate or spend their Bitcoin, increased number of transactions leads to increases mining rewards, more miners will start operating again. Even my summary is just a very rough, incomplete summary.

Since you probably suggested that Bitcoin will crash into oblivion when you said

And we know how that would pan out for Bitcoin.

it is not going to happen for that reason. This doesn't mean that limited intentions to spend or transact Bitcoin could somehow be a bottleneck for network expansion, but it will neither mean the end of Bitcoin. One counter example is gold: nobody uses gold to pay anything, people hoard it and while gold is not dependent on a security algorithm being held up by miners, it is a weakness at the same time for gold as there is no verifiability, no mobility and many other aspects that make Bitcoin strong.

Ultimately, Bitcoin would still be doing well even if the hash rate drops by a bit.