The key to unlocking the implications of megapolitical change is understanding the factors that precipitate revolutions in the use of violence. These variables can be somewhat arbitrarily grouped into four categories: topography, climate, microbes, and technology. - Sovereign Individual
This note will look into how game theoretic principles are playing out in the cryptocosm. Hyperbitcoinization (bitcoin taking over as the dominant global currency) is the cypherpunks dream. The game theory involved is fascinating even if the premise seems mad.
So, what just happened with El Salvador? This may be just the event that creates knock-on effects that lead to a hyperbitcoinized world.
Hyperbitcoinization is the idea that Bitcoin’s success could be viewed as a chain reaction, a set of dominos if you will, leading to bigger and bigger events. Marc Andressen wrote about Software eating the world, Hyperbitcoinization is the premise of Bitcoin eating the financial world.
The inputs to the reaction are time, labor, technology, and other assets. The output is a new global reserve system powering a free and open monetary system that doesn’t exclude anyone and cannot be debased by any government or organization. There will only ever be 21 million bitcoin. But how exactly does this chain reaction work, if it does work at all?
To understand this process, we need to establish a multi-dimensional spectrum of participants. First, let’s label the spectrums.
Rich on one hand, and poor on the other hand
Tech savvy on one hand (young), and less so on the other hand (old)
Institutions on one hand, and individual actors (retail) on the other hand
Each participant has a certain level of motivation to join the Bitcoin network (by running a full node, by buying bitcoin, by writing code that connects to the network, etc). In general, one can make the observation that the more people participate in the network, the more valuable it becomes which brings in more people, etc.
On some level this relation maps out to something that looks like Metcalfe’s Law, where the value of the entire network is roughly equivalent to the number of participants squared.
By combining this observation with the knowledge that participation in the cryptocosm tends to be quite “sticky,” (think about falling down the Bitcoin rabbit hole - white papers, videos, podcasts etc.) that is to say that people who do a certain amount of research and spend a certain amount of time in the space end up staying more often than not.
These people who stay in the network through boom and bust cycles form an ever-expanding base that is a critical part of a positive feedback loop. These long-term participants have the deepest understanding and appreciation for Bitcoin and are a valuable resource for newcomers into the space. These are the HODLers who are driven more by the technology and the grand idea rather than short term price action.
Now let’s consider the first of the spectrums, rich vs. poor. If you’re rich, you might be involved in Bitcoin and crypto because you see the potential as an investment. In this case, let’s say being “rich” just means you live in The West and you are at least middle class. The majority of the poor live in places with less developed economies, more oppressive regimes, and generally places without a stable national currency of their own. For the poor, there is actually a need for financial services.
El Salvador for example, has an unbanked population of 70%. That’s an overwhelming majority of people with no access to a checking account or many of the other things we take for granted. Using a game theoretic framework, we can say that people who are either very rich, or very poor are more likely to be interested in Bitcoin. Its an interesting bifurcation of people that is not unlike many political and social factions in society. It’s actually the people in the middle of the spectrum who are somewhat comfortable who may not see a need, or an opportunity, and therefore are less likely to act. The middle class, at least in the US, is starting to take notice as well.
Now let’s consider the tech savvy versus those that are not so much. In general being tech savvy tends to be highly correlated with age. And as we’re probably all aware, Bitcoin participation (and crypto in general) tends towards the younger generations. Recent reports show that millennial millionaires hold at least 25% of their net worth in crypto.
Moving onto the last category, we have institutions versus individuals. The dividing line here comes into play because of course all institutions are defined by groups of humans. And very few individuals exist in isolation. It’s much easier for an individual to get involved with Bitcoin than it is for an entire institution, so this spectrum will tend towards the individual. Now, let’s summarize this data in the following table.
Now this is where it gets interesting. Notice that the old institutions are the cross-section of actors that we’ve defined which are the least likely to participate in Bitcoin. However, younger institutions are in the “maybe” bucket. Also, institutions that are either rich or poor are classified as “maybe.” So what does it take to tilt the playing field?
Network effects have a an important role to play here as well. For example, at first there was no way to participate with Bitcoin in traditional markets. But then came the GBTC, then COIN (Coinbase), and MSTR. Eventually, there will be other instruments like an ETF.
What if this continues? Then there will be crypto ETFs in baskets of other portfolios, and eventually there would even be Bitcoin companies in the S&P 500.
Now let’s revisit the likelihood of participation under a scenario where Bitcoin survives and continues to grow. Old institutions would switch from “No” to “Yes.”
Why? It’s actually in the definition of the market. All employees with 401k plans participate in the market by default and Bitcoin is just another part of the market. Fed buys corporate bonds? Good for Bitcoin. GDP grows? Good for Bitcoin. As long as the money printing continues all assets benefit.
Recall that before El Salvador announced their plans to make Bitcoin legal tender, US tech companies were leading the charge (Square, PayPal, Tesla, Microstrategy). Now think about the domino effect that could happen here, and ask yourself what you think Mexico, Panama and Brazil will do?
If these trends continue (and all it takes is for the entity closest to the edge to cross over) then the price of Bitcoin will be pushed up higher. This will attract the next closest entity, and so on.
The options of a country or corporation are as follows:
Put BTC on the balance sheet.
If ones does nothing, and ones neighbors or competitors act, then one will be left behind. If one does act, then one forces ones neighbors and competitors to follow, ensuring that ones action was the correct one. See how this works?
An important viewpoint in classifying games is this: Is the sum of all payments received by all players (at the end of the game) always zero; or is this not the case? If it is zero, then one can say that the players pay only to each other, and that no production or destruction of goods is involved. All games which are actually played for entertainment are of this type. But the economically significant schemes are most essentially not such. There the sum of all payments, the total social product, will in general not be zero, and not even constant. I.e., it will depend on the behavior of the players—the participants in the social economy. This distinction was already mentioned in 4.2.1., particularly in footnote 2, p. 34. We shall call games of the first-mentioned type zero-sum games, and those of the latter type non-zero-sum games. - John von Neumann, Theory of Games and Economic Behavior
This game of chicken ends when the last participants are forced to follow suit. No one wants to fall behind on the global scene. Ironically, this situation could lead to a very rapid redistribution of wealth from the stragglers to the first movers. In other words, the early-adopting rich will get richer, the poor could move up into the middle class, but it’s the people in the middle of the pile who are complacent that might fare the worst. Inaction due to over-thinking ones options leads to worse outcome. Do not get stuck in the middle, act quickly and benefit from the rate of growth and adoption.
But this is the way of the world in the “Age of Turbulence”, coined by Alan Greenspan. While game theory can help us understand why “widget company 1” has to cut prices to compete with “widget company 2,” and why mutually assured nuclear destruction is a powerful deterrent to nuclear war, the implications of the game theory framework are far more wide-reaching.
Consider one final example:
Will country A debase their currency? What happens if they don’t? Well someone else will gain office promising to give away free stuff and here comes the printing press. If they do debase their currency, people get used to the free stuff and some of them enjoy getting paid not to work so the debasement continues. What about country B? Well if country B was an export economy and now their currency is appreciating against country A due to their debasement, they have to debase as well or they will see their GDP growth decline.
This trivial example helps to explain why as long as ANY country has people who want free stuff, as long as politicians can get elected for providing it, and as long as ANY export economy wants to maintain their GDP growth, debasement will continue.
As technology revolutionizes the tools we use, it also antiquates our laws, reshapes our morals, and alters our perceptions. Technology is created to be wielded as tools for the improvement and mastery of ones environment. Bitcoin may be one of the best inventions in the last 100 years to do just that by prying money from the hands of nefarious actors and distributing it in a way that promotes self sovereignty and democracy.