top of page
  • Writer's picturePatrick Aloisio

The Game Theory of Waiting on Bitcoin for Countries, Companies, and You

Originally posted on Twitter, you can view the full thread on Twitter here

Recommended guide: Twitter

IG video link

TikTok link

YouTube link

 

Why waiting on Bitcoin could be catastrophic for companies, countries, and yourself? Blame this thing called Game Theory! What does it mean? Let's take a look at this economic idea...


1/ As an Econ major, this was always one of my favorite topics. In nerd speak, Game Theory is a theoretical framework for conceiving social situations among competing players. But basically, Game Theory shows the choice of actions by all the parties, & how it changes the outcome.


2/ Probably the most common example to explain this is called the Prisoners' Dilemma. How it works is 2 prisoners are arrested on suspicion for robbing a bank. Both of them are taken to different rooms for questioning.


3/ Neither of them want time in jail. It's in the crime team's best interest not to confess, because if they don't, they'll only get 1 year each. HOWEVER, the big catch is if one of them doesn't snitch but the other does, the snitch gets off free and the partner gets 20 years!

bitcoin game theory

4/ Since they are each being interviewed separately, they can't be sure what the other one will do. After all, they are both criminals! The idea is that they both will act selfishly and act in their own best interest by ratting on the other.


5/ Ironically (maybe deservedly?) they both do worse than if they had cooperated together by not confessing. They each get 5 years as seen in the matrix picture.

bitcoin game theory

6/ A version of this is explained in A Beautiful Mind (great movie!) depicting John Nash who would go on to win The Nobel Prize in Econ for his game theory breakthrough. The box in the matrix where both prisoners confess is actually referred to as the "Nash Equilibrium." Another common example is OPEC setting oil prices. This framework is all over the everyday world.

7/ So what does this have to do with Bitcoin?! Well, right now we are getting to a very important inflection point... Bitcoin and crypto are still SO EARLY, but a $1 Trillion market cap for BTC is way too big to be ignored any longer.


8/ Let me preface this by saying I don't believe Bitcoin can successfully be banned by countries, (more thoughts on that in this linked article) but for this example we will make the assumption that Bitcoin can be banned...

9/ In a vacuum, it's in all of the countries/governments' best interest to cooperate and not allow Bitcoin. They wouldn't lose any power & control over their people, and their currency wouldn't get devalued. BUT, like the prisoners from the example, this is much easier said than done...


10/ How can each country trust that the others will hold up their end of the bargain? You see, if Country A bans it, but Country B embraces it, Country B may gain a distinct competitive advantage over Country A. Let's create our own Prisoner's Dilemma to show this...

bitcoin game theory

11/ If both countries cooperate & ban Bitcoin, they will maintain their power & financial standing. If B betrays A, then B gains a financial competitive advantage from increased acceptance making Bitcoin 🚀, and the people/companies in A who are pro-BTC will want to relocate to B

bitcoin game theory

12/ If and when Country A does adopt BTC, them being late to the game it's now more costly for them to buy in. Plus their economy suffers from the individuals who moved away and innovative companies that were launched in Country B instead.

bitcoin game theory

13/ Clearly this is an extremely simplified version, but it helps show the ramifications of the decision making process & their considerations. Ultimately both countries will betray each other! Now think about 200 countries being involved at once. Odds are low they can all agree.


14/ El Salvador recently declared BTC acceptable as legal tender. It doesn't move the needle much in a strict market cap sense. But it does make a big impact in terms of the significance of a country having BTC on their balance sheet & being proactive with starting BTC mining too.


15/ Right now as a result, every other country is watching closely and having the discussion on Bitcoin. The discussion is where it begins. Discussions become strategic planning. Strategic planning becomes proposals. Proposals become legislation.

bitcoin game theory

16/ Discussion is happening right now in Brazil about increasing regulation that would make BTC payments more acceptable nationwide. Brazil is about 13th in GDP, far dwarfing El Salvador's size at about 107th in GDP. A domino that would definitely move the needle.


17/ The granddaddy domino of them all, the US, has a few key people leading the Bitcoin charge in @SenLummis and Miami mayor @FrancisSuarez . Also SEC Chairman @GaryGensler recently made statements that were generally received as pro-crypto. Only a matter of time...?

bitcoin game theory

18/ This game theory analysis for countries can be applied to companies, banks, and even individuals too. As Bitcoin adoption increases, the early adopters will get rewarded, and the latecomers will fall behind...


19/ Right now everyone is sort of staring at each other waiting to see who makes the first move.

20/ You can see it with the banks. They started out not acknowledging BTC, and they've consistently changed their stance over the years. They keep following each other because they don't want to lose a competitive advantage. Gradually, then suddenly...

bitcoin game theory

21/ A major domino hasn't fallen yet. Maybe something like Amazon announces acceptance? Maybe a leading bank puts BTC on their balance sheet? Who knows what will start the big reaction...


22/ But let me go on the record saying once a major player does, the dominoes will be fast and widespread. Probably faster than you can even imagine as everyone starts FOMOing in. Make sure you're on the right side of history. It will be quite costly if you're not...

23/ If you're interested in Bitcoin, these are some of the very best people you should be following:


24/ Hopefully you enjoyed this thread! If you thought this thread was interesting or helpful, follow me @Patrick_Aloisio for more threads like this. Follow for more plain easy analysis.

 

Recent Posts

See All

Comments


bottom of page