Bitcoin: Prosecutor of the Prisoners Dilemma
Who will defect first?
Monetary Musical Chairs
Bitcoin has been described as a game of “Monetary Musical Chairs”. The 21 million limit of Bitcoins creates a game-theoretic stand-off between those that do and do-not buy Bitcoin. The purpose of this article describes the game, and illustrates how game-theory forces rational actors to choose Bitcoin every time.
In the Bitcoin game, there are only 21 million chairs, and anyone is allowed to sit in as many chairs as they can. Because of the absolute limit of supply, when a buyer purchases Bitcoin with no intent to sell, that chair is filled permanently. There is a price for everything, however. We can only assume that everyone could be convinced to offer their chair, so long that the price is right.
The current number of open seats in the Bitcoin network is a function of the number of Bitcoins left to be mined, ~3.5M, and the number of Bitcoin on the secondary market, which varies based on price. The higher price of Bitcoin, the more willing people will be to stand up from their chair, and offer it to highest bidder.
Over time, Bitcoin has only ever seen chairs become more filled, not less.
- 2011: June — November: 5 Months
- 2014: January — May: 5 Months
- 2018: January — Current: 12 Months
- Bitcoin’s entire lifespan: 118 Months
For all of Bitcoin’s existence, there have only been 22/118 months where Bitcoin’s chairs became less full. All other periods of time, we see Bitcoin’s chairs become fill, or stay the same.
Bitcoin’s Game
Bitcoin has a few qualities that force everyone to play the game.
You are playing the Game of Bitcoin, whether you like it or not.
The choice to not purchase Bitcoin is just as significant as the choice to purchase Bitcoin.
To elaborate:
- 21 Million Bitcoin limit ensures that demand for Bitcoin has a supply-limit to push up against.
- Demand for USD will cause the Fed to print more USD, to keep it stable.
- Because Bitcoin has a regular issuance rate, and a finite supply, demand for Bitcoin causes price to go up instead.
Therefore
- Purchasing when there is less demand (aka, lower price) is incentivized.
- By not purchasing Bitcoin, you are claiming that there will not be much demand for Bitcoin in the future.* (or you’re uninterested in crypto, investing, etc)
^This is why the term “no-coiner” exists. It expresses a group of people that have chosen to cooperate with traditional finance, and defect from Bitcoin’s incentive to purchase.
Finally,
- Choosing to not purchase Bitcoin is believing that other people will not purchase it as well, because they also do not believe in the future of cryptocurrency, permissionless P2P transactions, or Bitcoin itself.
Choosing to not purchasing Bitcoin is part of the Bitcoin game. It is not an option to be agnostic to it.
Cooperate, or Defect?
The prisoner’s dilemma is a basic example in game theory, that shows why two completely rational individuals might not cooperate, even if it appears that it is in their best interests to do so.
In the prisoners dilemma, two prisoners are forced to make a choice. Do they cooperate with their comrade, in hopes that their comrade cooperated with them? Or do they defect in order to save themselves, while betraying their comrade to time in prison. (Full explanation here)
- If A and B both cooperate with traditional finance, then Bitcoin will not receive sufficient demand for price appreciation. It will not become the worlds global reserve currency
- If A and B both defect, then Bitcoin will receive significant demand, and will appreciate in price. It will likely become the worlds global reserve currency
- If A defects, while B cooperates, then A will be able to purchase cheaper Bitcoin than B, as they got to purchase first. B is at risk that they will be forced to purchase Bitcoin when much more of the 21 Million Chairs have been filled.
This last point might have made you scratch your head. “Well, B never has to buy Bitcoin, so maybe they don’t lose out because Bitcoin never grew sufficient demand! Demand from 1/2 of two players might not be enough.
This is where the power of the global cryptocurrency market comes into play. This particular illustration of the prisoners dilemma is played with the entire global population, rather than just two prisoners. So we have instead:
“If 30 Million people all defect, while the remaining population all cooperate, then the first 30 Million will be able to purchase cheaper Bitcoin than the remainder of all people, as they got to purchase first”
(Bitcoin has had 31 Million unique addresses send/receive Bitcoin; an inaccurate stat to use, but a stat nonetheless)
30 Million people represents just 1/2,500th of the total world population; a very small fraction. Is 1/2,500th of the world defecting to Bitcoin enough to bootstrap the Bitcoin network?
Some points to answer this question
- Some people can sit in many chairs. Investment firms, hedge funds, central banks, governments, or any capital preserving entity, are able to purchase much more than their share of Bitcoin. Bitcoin attracts tech-savy developers along with bleeding-edge investment funds, that can understand Bitcoins Monetary Musical Chair value proposition. These people are able to move quickly, in order to ensure their seated position.
- Bitcoin is a global market. There are exchanges available in every single market. There are 4,000 Bitcoin ATMs across the world that require nothing more than cash in exchange for Bitcoin. 4,000 opportunities to sit down in Bitcoin’s chairs. Coinbase enables people to sit in Bitcoins chairs from people’s phones. For anywhere else where Bitcoin ATMs, or exchanges don’t operate (is there anywhere else?), Localbitcoins.com is available.
- It doesn’t take much. $1,000,000 is pocket change for an investment firm, but today, $1,000,000 gets you 250 Seats!
The point being made? Not that many need to defect for Bitcoin to significantly appreciate in price
Three Investor Types + One More
From this Prisoner-Dilemma viewpoint, I see three Bitcoin investor types that emerge.
Those that want in.
These are the people that believe in decentralization, P2P exchange, sound money, and the world of blockchain. They purchased Bitcoin early, enthusiastically, and have become it’s biggest supporters.
Those that don’t want to miss out.
These are people that might understand Bitcoin’s value proposition, but more importantly, have a fiduciary duty to their clients, partners, or themselves to ensure that they have exposure to a brand new asset class. This group is any type entity that is interested in capital preservation, and they might only invest 0.5–3.0% of their portfolio to Bitcoin. However, that percentage might represents millions and millions of dollars.
NoCoiners
These people represent “Cooperate” of the prisoners dilemma. They either decided that the Bitcoin value proposition wasn’t enticing enough to motivate them to buy, or the whole world of cryptocurrency/investing is not on their radar. Either way, they are sticking to traditional finance: Stock markets, bond markets, real-estate, or cash savings.
Forced Bitcoin purchasers (Aka, Adoption)
This last category will be the make-it or break-it point for Bitcoin. These people are not ‘investing’ in Bitcoin, but rather purchase it in order to get some specific task done. Pay a friend, buy an online-service, pay for something anonymously, or any other reason why someone might find it easier to use Bitcoin than Venmo, a bank transfer, or cash.
This represents Bitcoins “utility” value. The utility of the Bitcoin network and its P2P value transfer capabilities, that people are able to leverage to get the same kind of tasks done that normal money allows them to do.
This is Bitcoins end-game. Successful social-scaling by forcing people to use Bitcoin, because it provides the easiest method for getting someones value-transfer task complete.
If this stage is reached, those that have chosen “Cooperate”, and stuck with traditional finance, have fallen victim to their defecting comrades. They are the last purchasers of Bitcoin, in a stage where Bitcoin has become less of an investment, and more like cash. These people are forced to join the last group of Bitcoin adopters, as they are required to own Bitcoin to pay for some service or product, when they could have purchased Bitcoin 10 years earlier, at a much reduced price.
I have a podcast! Check out me and my co-host debate about MakerDAO!
POV Crypto — Episode 14: Bitcoin Vs. MakerDAO
Which is the Better Peer-to-Peer Electronic Cash System?
POV Crypto-Episode 10: HyperBitcoinization with Michael Taiberg
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Thanks for reading!
