Pascal’s Cryptocurrency Wager, & the Game Theory behind Cryptocurrency participation
You might not have heard of Blaise Pascal, the French mathematician, but you may have heard of Pascal’s Wager, in which even if individuals do not believe in God, they ought to pretend that they do. The rationale is simply a game theory 2X2 table.
In classic decision making theory, one always should make decisions based on best expected values of outcomes. Thus, given the two possible outcomes of God(s) existing or not, there are two choices to go down: if one chooses to believe that God exists, the two possible outcomes are either really positive or no significant change in outcome, whereas betting on no God when there may be one could be disastrous down the road, and being right that there’s no God likely won’t have a huge positive reward (other than maybe getting to brag to your other dead friends that you were right?). This tool has also been extended to rationale of why we should believe that global warming is real, because if we spend money on preserving the environment, that’s a better Type II error of falsely raising the red-flag, than it is to Type-I error and fail to raise the red-flag that the ecosystem is being disrupted by human behavior, and being right about conservation efforts and renewable energy to save the world is an infinite plus, whereas being lazy and not doing anything to change our human ways isn’t a significant reward either other than being able to continue being lazy.
With cryptocurrencies & betting on blockchain tech, there is an astounding amount of people that simply refuse to play the game — countless influential people do not spend the time to learn about the space, including leading academics that have spent their careers studying other “faddish” spaces for the purpose of education. For some, the wealthiest and most well-off don’t really have an incentive to risk it on cryptocurrencies — that they’re already fairly well off financially, and any potential risk of tarnishing reputation may outweigh outsized gains. And if these individuals do not spend the initial upfront cost to learn about the space, they will overestimate the projected risk rate of participating in this market, and thus completely stay out.
Essentially, the established have had little incentive to previously throw their hats in the ring of crypto.
As more people become aware of the blockchain and crypto space, more people are presented with their own version of Pascal’s wager. For the poorest, the least experienced, the people with the least shots at breaking out of their socio-economic background, they have the greatest incentive to try something different. This is why casinos and lotteries capture the risk-seeking nature of people and end up further trapping people in a poverty cycle.
Pascal’s *insert preferred cryptocurrency* wager works like this:
Bet someone that 100 *ABC coin* is going to be worth a lot [set your definition of a lot]1 year from now.
If 100 ABC coin isn’t worth a lot, you pay up 100 ABC coin on the bet.
If the 100 ABC coin is indeed worth a lot, your friend pays up 100 ABC to you.
In the potential downside case, your loss is fairly small. ABC coin has plummeted to worthless status and your friend doesn’t really earn anything for this bet. And even if the odds are that this is very likely that it does go to zero, your payoff won’t be unbearably negative.
In the potential upside case, your gain could be tremendous. The story of the bitcoin pizza is exactly this situation.
Say you and a friend are going to have some pizza and watch some movies online. You offer to pay up for the pizza if they promise to pay you back in bitcoin at that time (or even a future IOU for that many bitcoin at the spot price).
If you fail, hey you got pizza for your friend. Nothing like paying up on being wrong on a friendly bet that doesn’t really make you poor, and you’re fine paying for your friend’s pizza. No big deal.
Now, if you bought this pizza and got bitcoin from your bitcoin wealthy friend at this time, your friend probably still has some more bitcoin (provided he doesn’t make this deal with all his friends), and thus is able to off-load some of the potential downside risk of bitcoin while potentially enriching his friend.
And thus, every individual with little experience, reputation, or financial status can be presented with this Pascal cryptocurrency wager.
As more friends become evangelists of the crypto space as another “asset class” if you will, they will in turn tell their friends to join the space, creating more and more demand for a supposedly finite supply of tokens. The intense feeling of FOMO (Fear Of Missing Out) leads people to jump in before they even have time to read up and do their homework.
So is everything a bubble?
