Crypto Through a Game-Theory Lens

Crypto is a team sport, not an individual spurt.

In 2018 we have witnessed a new step for crypto: notwithstanding the prolonged market lows during winter, legal regulations have been emerging throughout the year. Many crypto economics analysts cite three main reasons for a bear market of 2018: 1). regulatory and global pressures that demand more accountability and augmented level of financial responsibility when it comes to crypto, as well as prohibition of crypto in some countries; 2).investigation into controversial stablecoins initiated by the U.S. Securities and Exchange Commission (SEC); and 3). Bitcoin hard fork on November 15.

However, the most common cause of the crypto price fluctuations is actions of crypto players, those who decide to hold on to the crypto (HODLers) and see crypto as an investment, and those who seek to make a quick buck and see crypto as a speculation.

Digital currencies are worth something because people value them as worth something, and a limited supply in crypto drives up both interest and price. However, dumping a big amount of crypto can lead to a “crypto scare”among other crypto players and will cause them to sell their crypto as well. This will lead to a greater supply and lower demand, thus causing the price to go down. One of the ways to explain a “crypto scare” is through a game theory lens.

Game theory is a major method used in mathematical economics and business for modelling competing behaviors of interacting agents. Game theory can be used to explain the actions of crypto players. According to game theory, two types of games can happen, based on their payoff:

1). Zero sum game: A game in which the gain of one player comes at the expense of another player. One actor decides to sell crypto and makes a buck on it, but it drives the crypto price down and thus, devalues it for another player who has decided to hold on to it.

2). Non zero-sum game: A game where the gain of one player doesn’t come at the expense of another player. If both people hold on to their currency then the price might go up or will maintain the average, and then they can both sell it at an acceptable rate. This approach depends on interdependence and mutual trust, as well as a prior arrangement.

So, what prevents us from reaching agreements? Self-interest prevails, and we forget that the only way to win is to reach a mutually beneficial outcome for all the players involved. The behavior of other players depends as much on you, as yours on them. If you see people run, or think that they will run, you do the same.

As Erin Griffith wrote in WIRED, “Crypto is an area that’s blazing with hype, greed, breathless speculation, and fear of missing out but is poorly understood by most people.”

Bringing a beginner’s mind and trying to build a market before profiting off it will create value that can be later captured more successfully. Whether this new “holistic” approach to the crypto market is feasible and doable to the crypto players remains to be seen.

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