Prisoner’s dilemma: crypto edition

Hodl theory — Can everyone win? — If everyone wins, does anybody win?

Image: Pixabay

Yet another currency

Let’s create an imaginary cryptocurrency. Call it PnDcoin. Its supply is limited to 1 million coins, out of which PnD Foundation holds 50%, and the rest is on the market. PnD coin has no intrinsic value. Sure, people will throw at you stuff such as “Metcalfe’s law” and “innovative tech”¹ to claim it has an underlying specific (measurable?) value, but it really doesn’t. Yes, it has a true value, a use, and importance, but one cannot pinpoint something attached to it which gives it value. It’s price is determined solely by what people want to pay for it. Period. Is that how it should be determined? Well that is irrelevant to the point.

Now let us assume that out of the 50% of PnDcoins in the market, me and Johnny own almost all of them (e.g. 24% each), and the price of one PnDcoin just rose from 0.1x to x. We get something close to a prisoner’s dilemma. If me and Johnny both sell right now, we will make x monies. If me or Johnny sells, while the other hodls, he who sells will make x, and the value of the other’s coins will be worth, say, 0.5x. If Johnny hodls, and I buy more, we will both have coins valued at about 1.5x. Now, if we both increase our positions, the value of our coins rises to 2x. It is supply and demand theory. With a fixed supply, as demand rises, price rises, and as demand falls, price falls. In this situation, it is therefore quite clear that if both increase their positions, both will win. It is the optimal scenario, everyone is happy.

The thought experiment above seems quite simple. Yet in reality, as Johnny and I make a 900% ROI on our first investment, we may be inclined to sell. After all, I expect Johnny to sell, because 900% is too good, and he probably wants to buy a car, and it is in my interest to sell before him. He is likely to think similarly. Therefore we probably settle for cashing out at the 900%, although 1900% was achievable.

Let us go even further. Assume that now the Foundation has opened their 50% share up to the market, and it floods with people eager to get their hands on this revolutionary cryptocurrency. If me and Johnny hodl as investors pour into the market, we will make big gains. Again, this is a theoretical experiment, so let’s push the boundaries. Say investors will consistently come into the market, and they are infinite. If me, Johnny and the first batch of investors hodl as the second batch joins the market, we will profit. After that, if me, Johnny, the first and second batch of investors hodl, as the third generation comes in, we will all profit. And this could go on infinitely. Actually, until the Foundation’s coins end. Now assume that after the coins are all distributed, the interest to buy is still high, and everyone is still hodling. No one wants to sell. With this external pressure, the price will continue to rise, as buyers attempt to find the price at which a hodler will crack and sell. Now, this price is not really real, because no transactions are being made. But it becomes the market price as soon as someone decides to sell, valuing the coin at a very high price. After that, if the majority continues to hodl, while sales occur here and there, and it is still “difficult” to get your hands on a PnDcoin, the price will continue to rise. And this can go on and on. The idea is almost the same as what happened when there was just me and Johnny in the game. You hodl, you win, everyone wins. Of course, in reality, it is not feasible that everyone will hodl, but as long as the majority of the people are holding long-term positions, either not selling or buying more, the whole community profits (in terms of money, but probably not in terms of development).

The experiment above is possible because there is no intrinsic value anchor, as I will call it. Stocks, bonds, real estate, all have this anchor. This is because their value is tied to something, and that true value— for example the company’s valuation or revenue— must somewhat keep up with the rise of the asset, or people will realize their asset is not worth its price, and sell. With a digital currency, or a store of value (the PnDcoin community still debates on what is its best use case), you can calculate using some crazy formulas measuring the value of the network or the technology it brings up, but as its purpose is merely to keep or exchange value, it is worth what people accept it is worth when they trade it. I remember as kid when we collected cards, and in each packet of cards bought, there was about a 1/6 chance of getting a “RARE” card. In theory, rare cards were worth more, and you could also easily calculate their value compared to common cards (an average pack would have a 5:1 rare:common ratio, making a rare card 5 times more valuable than a common one — in theory). And sure, there were times when we followed this theoretical concept. But sometimes, rare cards would trade for up to 20 common ones. And what happened when someone would be missing one common card to complete the whole collection? They would be willing to offer one, hell, even three rares to get it. The value was subjective, because mediums of exchange are valued at what the parties involved accept it to be worth, regardless of what the value is supposed to be. And I’m not saying there’s no such thing as overvaluation, I’m not saying PnDcoin’s price is not a product of speculation and I’m not saying that the usability shouldn’t be a measure of value. All I’m saying is that if I accept a banana as a payment for my gold bar, in this transaction price of banana=price of gold. And if the whole market accepts a banana for their gold, then that is what gold is worth, regardless of the usability and characteristics of both. Now, with this argument, you could say that stocks, bonds, and houses can follow the same idea. And they can. As we know, many times they are found to be valued at more than they “should be”. It is just even more fitting for cryptocurrencies such as PnDcoin because they aren’t tied to anything, they don’t even exist physically (stocks don’t either but companies do). Also, they aim at working as a medium of exchange specifically, which the others do not.²

Now, if you accept the points above, let’s move on to a final question. (If you do not, I would truly be glad to engage in a conversation in the responses to this post). If we all hodl PnDcoin, and we are all winning, are we all winning? New thought experiment: Say that tomorrow every single person in the world wakes up and their net worth has doubled. Is anyone truly richer? There are two possible answers to this question in my view: 1. No one is richer, because rich is a comparative term that requires a relative increase in wealth from an n number of people out of m (where m>n) and as everybody had their net worth increased by the same factor, there is no relative increase in wealth for anyone. Income inequality remains at the same state as it was. 2. The rich get richer, and the poor stay at the bottom, as a 1000 euro net worth increases by 1000 euros, whereas a 1 billion net worth increases by a billion. The increase is proportional, yet those at the top are the ones who are really making the big bucks. I personally see an argument for both, but mostly agree with answer 2. The bottom loses. And if you haven’t yet gotten the link to PnDcoin, I will make it clear in the next paragraph.

Marine mammals, cutting-edge technology and money making

Say the aforementioned “Hodl theory” is applied, and everyone makes 1000% profits on PnDcoin. Those truly winning are the so-called whales, and they are winning at the expense of the rest. Johnny, an owner of 24% of all PnDcoins will experience the same 1000% gain as Jerry from a given point t in time. But since Jerry only owns 0.001% of all coins, his 300 euro profit is quite nice, but nothing compared to Johnny’s 7.2 million. Better yet, if Jerry decides he’s made a lot of money and this is too good to be true, his dumping of the coins won’t affect the market a bit. Johnny, however, choosing to realize his profits, gets the millions, and can possibly cause Jerry’s 300 euro gain to become 100, or even -50, by the time Jerry wakes up.

Another interesting hypothetical scenario occurs when Johnny calls me, his friend, and we decide to tell the world PnDcoin is sure to hit $500,000. Remember: together we own 48%. We go on the news and claim we have done our proper analysis, and that we should be listened to because we’ve been here from the start. Since PnDcoin is at this moment a “mere” $16,000, everyone rushes to buy it, bumping the price up, only for me and Johnny to sell and crash the market at $450,000, or even $20,000, as most people watch their new house dreams melt before their eyes.

Is PnDcoin real?

After a multiple thousand-word thought experiment, I will try to be explicit as I conclude my thoughts. If you haven’t noticed, the article has some aspects very similar to reality. In my opinion, that is because despite being a theoretical approach, it has real implications in the cryptocurrency markets. Of course, values were made extreme and unrealistic ideas of for example infinity were used, but I believe the effect occurs similarly, just not under the same extreme conditions set by the hypothetical model (which is used to ease understanding). With that being said, this is what I take from the thought experiments above:

  • By playing the prisoner’s dilemma correctly and “hodling” as a community of a cryptocurrency, that currency is likely to have upside regardless of the returns it has given up to this point. I believe this is a large part of the upwards movement we see in crypto, and why currencies constantly rise to new heights (FOMO →HODL →RISE). I think this is especially clear in bitcoin’s history. And although I attempt to be as skeptical of specific predictions as possible, you can see a currency’s upside by looking at the subreddit for it and seeing how many people claim they will not sell before it hits x (usually accompanied by five exclamation marks and some unfounded arguments). That x value varies from person to person but many times it is very easy to find the “minimum value of x” in the community, after which it is not too unlikely the price of the currency will eventually get at least close to that number.
  • “Hodl theory” works assuming little to no intrinsic value in cryptocurrencies. I accept this assumption. It can also work with things that have a measurable underlying value, but because of such I think it has a limit to how far it can go, whereas in cryptocurrencies the limit is much higher.
  • By doing the above, we are all likely to profit. However, those profits are even greater to those on top, and I believe we are at their mercy more than we think. Currently, whales and sardines are riding this wave together, but the tide can easily change. After all, the whales are largely responsible for the wave . Also, the world is not as rational and predictable as the “Hodl theory” would imply.
  • Although not mentioned explicitly in the article, the following point is also implied: those that have invested in cryptocurrency A three years ago “win at the expense” of those who invested a year later, while those profit from those who came in six months ago, and from there forward. The markets are so crazy right now that people who first invested in cryptocurrencies two weeks ago can be considered “early” by some. And every newcomer, while making themselves a little pocket money, make the Winklevoss twins & gang of early investors even richer.

Upon reading and re-reading my words above, I recognize I show flashes of a cryptocurrency hater and others of a lover. I would like to openly state my bias. I am a supporter of cryptocurrencies and DLT as a whole. What prompted me to write this article was the contradiction the cryptocurrency market posed to my world view. I could not see how everyone was winning. Randomly selecting coins leads to hundred-percent returns in a week, and it all just seems too easy. The theory presented here (it is merely a theory) is one explanation I found for this phenomena. Right now, the prisoner’s dilemma is being played just right. But my more conservative senses still worry about this money-making machine, hence the extension of the theory to ask the question of who is actually winning. In all honesty, I both agree with those who claim we are just at the beginning, and those who claim this is all a bubble. Cryptos are here to stay yet most coins are overhyped and overvalued. But then again, the market still does not include a big chunk of the world population (99% at minimum), meaning there is still room for growth. All I can say is: make sure you know how to swim, cuz’ the sea is getting a little rough.


  1. I am not claiming cryptos do not have innovative tech or that Metcalfe’s law is no good, I just mean these things do not qualify for intrinsic value in my view. If the crypto lover in you is tingling with rage, start from the last paragraph. (back to text)
  2. Quick interesting point unrelated to the topic of the article: one ultimate goal of tokenized assets and cryptocurrencies in the long-run is to allow for the old-school “my cow for your two sheep” kind of trade without an intermediary (e.g. fiat currency). This opens up a wide variety of possibilities and allows for simpler mutually beneficial exchanges exploiting subjectivity of value. (back to text)