What happens if Bitcoin is banned by governments? Is it’s value zero?
It is not greed that drives a bull market, it is envy
Game Theory and the Wall of Institutions Surrounding BTC
It is easy to think of Bitcoin like Thomas Kuhn revolutions that represent a shift in paradigm, like a kind of Schopenhauer concept of Truth that at the beginning is ridiculous, then has a lot of opposition and is finally self evident.
Every Bitcoin believer and crypto evangelist sees themselves as visionaries that at the end of the adoption curve will triumph when the haters have no other option than to accept Bitcoin.
However, to be fair, there have been many promising technologies that failed. The same question is valid for the many altcoins. Ethereum, Bitcoincash, Ripple, EOS, Polkadot, etc. Not all of them will survive.
Game theory could help us understand what are the key parameters in BTC and other’s quest in developing a new social convention?
We can think of corporations, institutions and banks as a population of players; each facing the dilemma of adopting or not adopting Bitcoin in their treasury, or offering access to BTC as its customer base. The same dilemma is also faced by governments that could ban BTC or enable the development of the whole ecosystem. No, the government doesn’t want to lose their control over fiat money as legal tender, but countries with a more flexible regulatory framework could have a big advantage over the ones that forbid them.
R= Reward for not adopting BTC.
T= Payoff of adopting while your competitor is not adopting.
S= The payoff of not adopting while your competitor is adopting.
P= The payoff of both adopting BTC.
The prisoners' dilemma solution works when T> R> P> S, so in order to have a full adoption, or T, the temptation is there to adopt the new technology over the competitor. The Nash equilibrium is when both players adopt Bitcoin, however, the evolution towards this equilibrium is still not evident.
Here we use the framework of evolutionary game theory in order to simulate the evolution of Bitcoin adopters (black) and non-adopters (white).
Case 1: Indifference between BTC and not adopting it.
T = 1.2, R = 1.1, P = 0.1, and S = 0
For example, when there is indifference, the simulation shows that the population does not adopt the new technology. In white is the population of companies that do not adopt BTC, while in black, are the companies that will adopt BTC. The simulation shows the coexistence between both populations. However, the majority of the population is not adopting BTC.
Case 2 (Post Pandemic Era)
T = 1.61, R = 1.01, P = 0.01, and S = 0.
As T increases, we enter in oscillation when the population of Bitcoin believers increases and is attacked by a population of Bitcoin haters or a population using an alternative technology such as digital currencies backed by central banks.
Case 3 (Inflation and geopolitical risk )
T = 2.8, R = 1.1, P = 0.1, and S = 0
Here, the population converges rapidly to betraying the traditional system and adopting the new technology in our example, Bitcoin adoption.
When T >> R , Schopenhauer is right and BTC is a contrarian truth that became self evident. The world became crypto land.
Factors that changed T
What changed T :
The pandemic response. Fiscal and monetary all-in for developed countries.
Currency crisis in emerging markets.
Corporations worry about the soundness of having USD a reserve of value and US bonds. It makes sense to think about a hedge after a 30-year bull market in treasuries.
It is definitely not the same game for Bitcoin before and after the pandemic began, but we don’t think it is enough to get the condition T>> R.
What could make T>>R ?
Inflation
A divergence of the Internet into one led by the US and another by China will create a very strong case for Bitcoin, a digital gold.
If you are a student, a Bitcoin believer, strong analytical and computing skills, to go with an interest in game theory and would like to do a 3-month internship on an island in Brazil beginning in March 2021, please write to guillermo@macrowise.co with a research proposal and the implementation of the evolutionary game theory model in R or Python.
Here is the link to the original framework:
https://plato.stanford.edu/entries/game-evolutionary/
Kind regards,
Guillermo Valencia A
Macrowise Co-founder
November 23, 2020
Florianópolis, Brazil.