Applying Game Theory to Bitcoin Cash: To Sell or Not to Sell
The article, “The Myth of Bitcoin Cash: Understanding Game Theory”, was written in late July of this year regarding the applications of game theory to the then-upcoming split of Bitcoin called Bitcoin Cash. The article begins with the definition of Nash Equilibrium and a discussion of how to move a market to a higher payout equilibrium. The author makes the statement that by the definition of Nash Equilibrium each player in the network acts “properly (correspondingly) in relation to their own utility function”, meaning that even though the players act completely rationally, the market is not at the highest efficiency though it is at equilibrium. The author writes that Bitcoin was introduced in order to move to a higher payout equilibrium relative to money markets, as it “creates a non-zero-sum game in which players gain together rather than one or some players gaining from exploiting another.” However, as the blog posts “Game theory and its applications to Digital Currency Mining” and “Gaming Bitcoins” points out, players and especially large pools end up playing unfairly in the Bitcoin network to maximize their utility, so there is still much efficiency to be gained.
Bitcoin Cash is a fork of the regular Bitcoin cryptocurrency, essentially a modified Bitcoin with some added features that shares the transaction history of Bitcoin. This has been done before, but Bitcoin Cash is the first to make major news headlines and is worth more than any other Bitcoin offshoot. Fitz Tepper’s article, “WTF is bitcoin cash and is it worth anything?”, reveals that even though Bitcoin cash was trading at the 4th highest market cap of any cryptocurrency, there’s little to no liquidity and so it really can’t be traded. This means that its price is likely to plummet after people begin to trade it, selling it in large amounts, and it will not retain its value. Furthermore, some exchanges like Coinbase are refusing to trade using the new currency. This parallels the conclusion made in “The Myth of Bitcoin Cash” which was written even before the release of Bitcoin Cash, that only irrational players would buy Bitcoin Cash since rational players will follow their own utility functions and sell off their share. Furthermore, the author posits that even in the case of widespread defection from the core Bitcoin, its price will continue to increase, making it more valuable and a more rational buy than Bitcoin Cash.
In summary, by applying the concept of Nash Equilibrium to cryptocurrency mining like we learned in class, we can show that the value of Bitcoin Cash was destined to fall before it was even released. The conclusion in “The Myth of Bitcoin Cash” reached by analyzing Bitcoin Cash with concepts from game theory is seconded by Tepper’s observations after the cryptocurrency’s release in his article “WTF is bitcoin cash and is it worth anything?”. For those with newfound Bitcoin Cash wallets, it can safely be said that the best option is to sell as soon as possible and buy core Bitcoin.
https://medium.com/@rextar4444/the-myth-of-bitcoin-cash-understanding-game-theory-f87858bf8791
https://blogs.cornell.edu/info2040/2017/09/09/gaming-bitcoins/
https://techcrunch.com/2017/08/02/wtf-is-bitcoin-cash-and-is-it-worth-anything/