The application of game theory in Bitcoin investment was once thought to be a far-fetched theory for Bitcoin Maximalists. However, the current developments are showing signs of the effective implementation of this theory.
Specifically, here are the observations from BeInCrypto from the perspective of industry leaders.
Bitcoin, Game Theory, and the Nash Equilibrium
Game theory helps evaluate the outcome of an individual's decision, when the outcome also depends on the decisions of many other individuals. The classic game theory scenario, often used as an example to understand the basics of this theory, is the "Prisoner's Dilemma".
Example illustration of game theory. Source: Economist.According to the illustration, the best decision for both prisoners is to "remain silent", where the consequences are "equally divided", and no one suffers more than the other. This state is called the Nash Equilibrium - named after the mathematician John Nash.
From this example, drawing an analogy to Bitcoin (BTC) investment, the decision to reach the Nash Equilibrium is when the majority of entities decide to "buy Bitcoin". In this case, everyone who buys will make a profit. This may seem irrational, but along with the promise of the US President-elect Donald Trump about a strategic Bitcoin reserve plan, many experts believe it will trigger a nationwide FOMO. And many other countries will decide to "buy Bitcoin".
Thus, the Nash Equilibrium state for Bitcoin investment becomes a reasonable expectation.
Opinions of Industry Leaders on the Effectiveness of Game Theory for Bitcoin
Matt Huang, co-founder and Managing Partner at Paradigm, believes that from a game theory perspective, Bitcoin is currently like "gunpowder". When a country has "gunpowder", other countries are forced to have it to protect themselves, which is inevitable.
"Sovereignty is no longer capable of eliminating BTC. From a game theory perspective, BTC is like gunpowder, not an iPhone... once gunpowder is discovered, all sovereignties have to accept it.... The same is true today for AI, drones, and other critical technologies. Sovereignties that build BTC reserves early will benefit significantly from better entry prices. The race to build BTC reserves is on." - Matt Huang
There are recent signs indicating that what Matt Huang said is plausible. Recently, Polish presidential candidate Slawomir Mentzen pledged to plan a strategic Bitcoin reserve if elected. Other countries like Bhutan and El Salvador currently hold a total of 18,900 BTC worth over $1.7 billion. Many companies are also "mimicking" MicroStrategy in accumulating Bitcoin (like Metaplanet) or increasing their holdings of Bitcoin ETFs.
Rajat Soni, CFA, believes that in this game, retail investors will make the worst decisions by just waiting for the "dip".
"The worst-case scenario for most people is Bitcoin going up to $100,000, then $250,000, then $500,000, then $1 million and beyond. There is a lot of money sitting and waiting for the 'dip'. You need to understand that MOST PEOPLE HAVE NO ALLOCATION. This is game theory - everyone is trying to predict the next move of others... and retail investors will make the worst decisions here." - Rajat Soni, CFA
The Bitcoin for Freedom account is one of the most enthusiastic about the application of game theory to Bitcoin, predicting that the time will come when people will feel lucky to buy Bitcoin at a price below $1 million.
"When the game theory between major countries takes effect, BTC will go past $10 million as if nothing happened, and people will think you are extremely lucky to have bought it at a price below $1 million." - Bitcoin for Freedom
However, not everyone agrees with these predictions, a recent BeInCrypto report points out the reasons why many experts believe that the strategic Bitcoin reserve plan will be disastrous for the country.
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