How does game theory work in Bitcoin?

Did you know you’re playing the Bitcoin game, whether you want to or not?

The adoption and price of Bitcoin tend to increase over time, and this has to do with game theory, a series of incentives that align with Bitcoin and encourage the whole world to participate in the game of adoption.

Check out all about this game theory below!

What is game theory?

The game theory arose from the theories of a mathematician named John Von Neumann.

He observed that the economy operates like a game, where people try to anticipate each other’s moves all the time. In other words, our decisions depend not only on our preferences and behaviors but also on what others are doing and how we interpret the world.

The Influence of Game Theory on the Economy

In economics and games, the good investor or player is the one who can anticipate movements, preparing better for any situation. That is, in the economy, it is the investor who analyzes fundamentals and trends before buying a valuable asset. Thus, they purchase it at a lower price before others recognize its value and start buying the asset as well.

In games, it would be the unbeatable chess player who can anticipate 18 moves ahead of their opponent.

See? That’s why the economy affects everyone.

Everyone is playing the economic game, as the whole world uses currencies issued by central banks, known as fiat currencies.

However, this system is broken! The dollar and all other currencies of the past, the Jurassic Fiats, died of acute inflation in past economic crises.

That’s why if you’re not protecting yourself from the game over of fiats, you’ll be affected too. The Central Banks’ currencies are losing purchasing power, and everything is getting more expensive, and salaries and many other traditional investment assets do not keep up with inflation.

In this macroeconomic context, the incentives are huge for investors to start looking for ways to protect themselves from inflation, flee from negative interest rates, and protect themselves from economic crises in the fiat system.

The solution to escape from this sinking ship is Bitcoin

So, how do we navigate away from this situation? By embracing Bitcoin!

Bitcoin is increasingly playing a crucial role in macroeconomic disputes and is operating on four levels within this game theory:

1. on people
2. on companies
3. on investors
4. and on countries

On people

It affects people when someone remembers the first time they heard about Bitcoin and didn’t buy, or when they saw Bitcoin appreciate by several percent but believed in the reports or the economists who were skeptical and claimed that Bitcoin would die and that it was a bubble.

Since Bitcoin was created, there have been claims that it will die. However, with each passing year, the opposite happens—it becomes stronger. Every year that goes by without Bitcoin dying is a testament to its resilience. By surviving through everything, Bitcoin has the power to change people’s minds and turn skeptics into enthusiasts.

This was the case with investor Howard Marks or Sven Henrich, known on Twitter as NorthmanTrade.

In February 2021, Sven Henrich criticized Bitcoin and later changed his mind. A year after throwing stones at BTC, he released an article supporting Bitcoin called “Bitcoin Revolution,” added laser eyes to his profile picture, and made a point of demonstrating that he embraced the orange pill.

Bitcoin has shown that arrogance and presumption are not profitable. Therefore, it is crucial to have the humility to review outdated economic models in order to maintain financial health.

Furthermore, Bitcoin’s parabolic appreciation movements are the main incentives for people to decide to buy. It’s the most primitive trigger: greed.

Bitcoin is a NgU

At first, most people come in for speculation. But as they begin to understand Bitcoin’s monetary fundamentals, they realize it has a long-term appreciation trend, so people start buying it with the intention of protecting their wealth in an alternative financial system.

As they say overseas, Bitcoin is a NgU (number go up technology), a technology to make numbers go up.

In the end, this is the result: the more people realize the features of Bitcoin as scarce, unseizable, and truly decentralized money, the greater the adoption and, consequently, the appreciation as well.

Like a positive feedback loop, where more volatility attracts more attention from investors and the market, ultimately attracting more capital, companies, and institutions, this increased demand leads to price increases, and volatility again grabs more attention.

You may like to read our article: Games to earn Bitcoin for free

Companies will also enter the game

Among the companies, we are seeing Microstrategy, led by Bitcoiner Michael Saylor, carry out corporate-level DCA (dollar cost average).

Microstrategy currently holds about 140,000 BTC and continues to buy consistently.

What’s most curious is that Microstrategy’s shares appreciated 300% after the announcement that they would put Bitcoin in their treasury. Therefore, this shows how the market supported Microstrategy’s position.

Note that after Microstrategy began buying Bitcoin, the company’s stock price began to track Bitcoin’s movements, including the stock price appreciating parabolically at the end of 2020, right around the time when Bitcoin was also starting to take off.

Microstrategy kicked off the movement of companies buying Bitcoin by showing the capital market the incentives that companies have to allocate part of their assets, their treasuries, in Bitcoin.

This is where game theory gains traction: other companies will keep an eye on this and will be incentivized to do the same.

In the end, it is likely that in the near future, most companies will have Bitcoin in their treasuries. And in this scenario, the companies that buy first will have a greater upside than the others.

On investors

At the investor level, the incentives are even greater.

Bitcoin was the best asset of the decade, has been considered an improved digital gold, and has had a risk-return ratio much better than any other financial market asset.

This means that even a small exposure to Bitcoin can yield asymmetric returns, where a small portion of the portfolio makes all the difference.

In the current scenario of galloping inflation and negative real returns, the riskiest thing to do is not to have Bitcoin!

That’s why we’ve seen so many investors like Bill Miller and Druckenmiller saying they’re increasingly taking positions in Bitcoin.

Bitcoin is a geopolitical tool

At the country level, Bitcoin will be a crucial geopolitical tool going forward. It is evident that no country fully trusts one another, and monetary policies serve as a means to maintain control over a specific geographic territory.

Countries remain dependent on the dollar, but in the event of an American economic crisis, everyone becomes exposed.

Furthermore, dollar hegemony excludes adversaries from participating in the global financial system. The United States imposes sanctions, trade blockades, and vetoes that prevent enemies from engaging in negotiations with other countries that maintain relations with the US.

So, Bitcoin is an open financial system accessible to everyone, and any nation can utilize it without barriers. Therefore, there are no sanctions within Bitcoin, and the United States holds no veto power in this monetary system.

That’s why the first countries to adopt Bitcoin will be those who take the lead in the hash race, like El Salvador.

What is the hash race?

The hash race is when countries will start competing with each other to buy Bitcoin and to have the computational power to participate in Bitcoin mining.

Incentive structure

Indeed, everything mentioned so far pertains to the external world. However, Bitcoin also incorporates game theory in its incentive structure to safeguard the security and decentralization of the network itself.

All incentives are designed in a way that encourages nodes, miners, and any participant connected to the network to abide by its rules.

Consequently, anyone who deviates from these rules or attempts to manipulate them will be swiftly detected, and the attack will be promptly neutralized. This stands in contrast to other networks where attacks occur, are later reversed, and then a pursuit of the hacker ensues in an effort to penalize them.

So, the Bitcoin network rewards honesty, transparency, and constant data verification. Therefore, it is a network based on truth and on preventing bad behaviors rather than remedying them.

Everything in the world moves towards incentives, and Bitcoin seems to be the piece that was missing to bring to the digital world a currency that was aligned with the most solid economic fundamentals for a better future.

Game theory is a fascinating subject, and over time, we discover new incentives where Bitcoin connects.