TOPSHOT – President Trump’s plan to create a “national bitcoin stockpile” has fueled speculation … [+]
Bitcoin skyrocketed to an all-time high of $108,000 last month. Fueling the ascent 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 a US bitcoin reserve could drive such a monstrous rally. To understand how bitcoin managed to appreciate 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 A Strategic Bitcoin Reserve
Proponents of a strategic bitcoin reserve believe that the United States has much to gain by being the first developed nation to fully embrace bitcoin as a reserve asset. Their logic is straightforward: As with any new technology, the greatest benefits accrue to early adopters. And being the first G20 country to adopt bitcoin as a store of value would all but require other countries to follow suit. The unprecedented success of the bitcoin ETF serves as a compelling beta test for this idea.
Earlier this year, the BlackRock bitcoin ETF became the fastest-growing ETF of all time, surpassing $10 billion in assets under management in just seven weeks. The value of this ETF has since tripled. Today, it stands as the most valuable of all the 1,800 ETFs that have launched in the last four years.
By being bold—and by being early—BlackRock has reaped enormous rewards for pushing the Overton window in favor of bitcoin. So too, the thinking goes, would the United States.
BlackRock’s embrace of bitcoin sent a clear signal to the rest of Wall Street: bitcoin is a legitimate asset class and is worthy of institutional adoption.
By the same token, the United States’ embrace of a strategic bitcoin reserve would send a clear signal to the rest of the world: bitcoin is a form of digital gold and is worthy of treasury adoption. And by being the first developed nation to hold bitcoin as a reserve asset, the United States would benefit most from the explosive network growth that would follow.
This is the pro-bitcoin argument for the strategic reserve in a nutshell. To break it down further, consider looking at the idea through the lens of game theory.
Satoshi’s Logic Applied to Nation-States
Most traditional economists missed bitcoin because they fixated on its technical properties and its practicality as a form of money while altogether ignoring the game theory behind its adoption. Satoshi Nakamoto described this game theory in a BitcoinTalk forum as far back as 2009: “It might make sense just to get some in case it catches on. If enough people think the same way, that becomes a self-fulfilling prophecy.”
In game theory vernacular, 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 the Bitcoin network will continue to grow—as it has exponentially for the last 15 years—there is only one rational choice: adopt.
Why?
Because—assuming continued price appreciation over the long term—any player who ignores bitcoin will put themselves at a competitive disadvantage against those who adopt. Consider the game theory matrix below to better visualize the dynamics at play And note the Nash equilibrium circled in orange. In game theory, the Nash equilibrium describes the most rational choice an actor can make based on the choices of other actors.
In game theory terms, a “coordination game” best describes the logic driving nation-state Bitcoin … [+]
The point: Economists can quibble all they want about the merits of bitcoin as a form of money. But they can’t ignore that the Nash equilibrium in a coordination game driven by positive network effects is to cooperate with other players—that is, to 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, we appear to be in the opening minutes of nation-state adoption. The clock is ticking. And in a game like this, there is no calling timeout.
The question is: Will the United States pick up the ball? Or will other countries get there first?
