A game theory perspective on the dilemma faced by countries using BTC, how to balance high returns and high risks?

Author: Chloe, PANews

On July 27th, at the 2024BTC conference in Nashville, Tennessee, Trump made a series of promises. He stated that if he is re-elected as president, he will strongly support the future development of BTC and cryptocurrency. He emphasized that the United States must lead in this field, otherwise it will be surpassed by China and other countries. Even if elected, BTC will be listed as a national strategic reserve asset. ‘The federal government will retain all of the approximately 210,000 BTC it currently holds, which accounts for 1% of the total BTC supply.’ (Related reading: Key points of Trump’s BTC 2024 conference speech: Will make the current SEC chairman step down and establish a BTC strategic reserve)

While the word was that BTC would hit the $70,000 mark on July 29th due to Trump’s support, the news of the Biden administration moving BTC immediately pulled the price back from its peak. Economist Peter Schiff believes that the Biden administration will sell all BTC before Trump takes office, and the transfer of $2 billion worth of BTC on the 29th further validates this speculation.

Trump wants to keep all the BTC currently held by the United States, but the current government is immediately dumping them, abandoning the substantial reserve asset as the cornerstone of the national strategic reserve. Despite the possibility that Trump’s statement on the 27th may become ineffective due to the impact of this week’s dumping event, it has raised a concept that has existed since the birth of BTC—the game theory of national adoption of BTC.

Is it better or worse for a country to adopt BTC? When can the first-mover advantage be obtained? We can understand this by using two core concepts from game theory: First Mover Advantage and Payoff Matrix

Concepts of Game Theory: First-mover Advantage and Payoff Matrix

First Mover Advantage is the first advantage. Countries that adopt BTC in the early stage have both high risks and high returns. Assuming the establishment of the BTC economy, early adopters will become the center of innovation and investment. They can not only attract businesses in the encryption field, but also set global regulatory standards for Digital Money. On the contrary, early adopters also face higher risks, including how to overcome existing regulatory challenges and face potential economic instability. Countries that take action earlier will have higher risks and returns in the situation.

And once some influential countries start adopting BTC, other countries will follow suit to avoid being left behind, resulting in a herd effect. This effect is driven by the rewards of adopting BTC and the risks of not adopting it. As shown in the graph below, the herd effect becomes most significant when the BTC adoption cycle enters the steepest part of the S curve.

Next is the payoff matrix, simply put, in game theory, the payoff matrix is used to describe the strategies and payoffs of 2 or more individuals.

We can use the payoff matrix as a computational tool to display the profits (or losses) obtained by different participants (countries) under different strategy combinations. Each participant selects their best strategy based on the strategies that other participants may adopt. The payoff matrix can help participants analyze and compare the results of different strategies in order to make the best decisions.

If we analyze whether a country adopts BTC based on the concept of payment matrix, it would be:

Suppose there are two countries, Country A and Country B, both considering whether to adopt BTC. Each country has two strategies to choose from, adopt or not adopt, and their payment matrices can be represented as follows:

In this matrix:

• Each cell represents the payoff of country A and country B after choosing a specific strategy combination.
• The first number in the cell is the income of country A, and the second number is the income of country B.

For example:

• If both Country A and Country B choose BTC (top left cell), they will each receive a profit of 10.
• If country A chooses to adopt and country B chooses not to adopt (upper right cell), country A gains a profit of 15, and country B gains a profit of 5.

Through such a matrix, Country A and Country B can analyze the results of different strategy combinations and determine their optimal strategies based on the other party’s possible choices. Ultimately, the matrix can help countries make optimal decisions under uncertain conditions.

For BTC adoption, each country will evaluate the costs and benefits of adopting or not adopting BTC and choose the best strategy. Not to mention, considering the cost/benefit trade-off, the optimal strategy is definitely adoption.

Applying Game Theory Algorithm, the country must find the best response function

In game theory, the best response function is the strategy that maximizes the payoff for a participant (country) given the strategies chosen by other participants (countries). It can be understood as, when playing with an opponent at the poker table, the opponent has already played a card, and how you should best use the cards in your hand.

In other words, it is the best response of players to the strategies of other players. Therefore, for countries considering adopting BTC, the best response function involves choosing their best strategy based on the expected actions of other countries. This includes considering the economic and geopolitical dynamics of other countries and the resulting impact.

So the overall logic is as follows: Country A first assesses the cost and benefits of adopting BTC, including considering potential economic benefits (such as becoming an innovation center, attracting investment, etc.) and risks (such as regulatory challenges, economic instability, etc.). At the same time, Country A also realizes that other countries are also conducting similar cost-benefit assessments. If other countries also decide to adopt BTC, this will have an impact on Country A’s strategic choices. If Country A expects that all other countries will choose to adopt BTC, not adopting BTC will put Country A at a disadvantage in competition. Therefore, Country A will conclude that it should also accelerate the adoption speed of BTC to avoid falling behind in competition.

The advantage of pioneers has been successfully reflected in institutions and even countries.

In order to have a more specific understanding of the game theory adopted by BTC countries, it can be reflected through several examples, including El Salvador, US states, and MicroStrategy. These examples all highlight that the game theory adopted will play a role in all institutions and even countries.

Since 2021, El Salvador has mined 473 BTC and has since recognized BTC as legal tender. Many government-related services in the country can also be credited in BTC. In addition to purchasing BTC, the government has accumulated 5825 BTC, with a Market Cap of $394 million.

In May 2024, Wisconsin became the first state in the United States to announce the purchase of BTC. They disclosed in the Securities and Exchange Commission’s filing that they had purchased a $160 million BTC ETF for their pension fund. Although this is not a large amount of capital for the $132 billion Wisconsin pension fund, it reflects the strategic consideration of the state’s support for BTC as a savings asset and its first-mover advantage.

MicroStrategy is also a model of first-mover advantage. At the end of 2020, Michael Saylor announced plans to purchase BTC and accumulated 226,000 BTC, accounting for more than 1% of the total supply. This was a very unpopular choice at the time in 2020, but now the value of these BTC has almost doubled, and the company’s Market Cap and enterprise value have risen 20 times and 40 times respectively.

In addition, from a broader perspective, if game theory is applied to Cryptocurrency (not limited to BTC), some advantageous strategies are highlighted. One strategy is to use stablecoins denominated in US dollars. Currently, there are 180 fiat currencies in the market, and the majority of them perform worse than BTC. By promoting the adoption of stablecoins denominated in US dollars in economies with currency failures, the position of the US dollar in the global economy can be strengthened.