Game theory drives nation-state adoption of Bitcoin

Bitcoin has risen to a level Highest level ever Worth $108,000 last month. Fueling the rise of the world’s largest cryptocurrency is speculation that the United States will embrace Bitcoin as a strategic reserve asset after the inauguration of President-elect Donald Trump.

Newcomers to digital assets may wonder how the US Bitcoin reserve can lead such a massive rally. To understand how Bitcoin has managed to rise more than 40% in value since Election Day, let’s take a closer look at the game theory behind nation-state adoption.

The logic behind the Bitcoin Strategic Reserve

Proponents of the Bitcoin Strategic Reserve believe that the United States has a lot to gain by being the first developed country to fully embrace Bitcoin as a reserve asset. Their reasoning is clear and straightforward: As with any new technology, the greatest benefits accrue to the early adopters. Being the first G20 country to adopt Bitcoin as a store of value will require other countries to follow suit. The unprecedented success of the Bitcoin ETF is a compelling empirical test of this idea.

Earlier this year, BlackRock Bitcoin ETF It has become the fastest growing ETF in… All the timesurpassing $10 billion in assets under management in just seven weeks. The value of this ETF has tripled since then. Today, it is the most valuable of all 1,800 ETFs launched in the past four years.

By being bold — and by being early — BlackRock reaped huge rewards for pushing the Overton Window for Bitcoin. The thinking also goes that the United States will do so, too.

BlackRock’s embrace of Bitcoin sent a clear signal to the rest of Wall Street: Bitcoin is a legitimate asset class and worthy of institutional adoption.

In the same vein, a US embrace of a strategic reserve of Bitcoin would send a clear signal to the rest of the world: Bitcoin is a form of digital gold and deserves to be approved by the Treasury. By being the first developed country to hold Bitcoin as a reserve asset, the United States stands to benefit most from the massive network growth that will follow.

That’s the pro-Bitcoin strategic reserve argument in a nutshell. To break it down further, consider looking at the idea through the lens of game theory.

Applying Satoshi’s logic to nation-states

Most traditional economists have missed Bitcoin because they focused their attention on its technical properties and practicality as a form of money while completely ignoring the game theory behind its adoption. Satoshi Nakamoto described this game theory in BitcoinTalk Forum Dating back to 2009: “It might make sense to just get some in case it catches on. If enough people think the same way, it becomes a self-fulfilling prophecy.”

In the language of game theory, what Satoshi described in just two sentences was a “coordination game.”

In this coordination game, players have two choices: adopt Bitcoin or ignore it. If players assume that the Bitcoin network will continue to grow — as it has done dramatically over the past 15 years — there is only one rational option: adoption.

Why?

Because – assuming prices continue to rise over the long term – any player who ignores Bitcoin will put themselves at a competitive disadvantage against those who embrace it. Consider the game theory matrix below to better visualize the dynamics at play and note the Nash equilibrium circled in orange. In game theory, a Nash equilibrium describes the most rational choice an actor can make based on the choices of other actors.

The point: Economists can quibble all they want about the merits of bitcoin as a form of money. But they cannot ignore that the Nash equilibrium in the coordination game driven by positive network effects is to cooperate with other players, i.e. buy Bitcoin. This logic has been the rocket fuel behind Bitcoin’s meteoric rise across three levels of adoption: first, among individuals. Then institutions. And soon nation states.

If Bitcoin’s recent price action is any indication, it appears we are in the early minutes of nation-state adoption. The clock is ticking. And in a game like this, there’s no time limit for calling.

The question is: Will the United States pick up the ball? Or will other countries get there first?