Global Adoption of Bitcoin as a Case of Game Theory Dynamics
With the continual rise in the adoption of cryptocurrencies, nations across the globe are facing the question of how the asset will play a role in influencing respective monetary policies in the future. On September 7, 2021, El Salvador became the first nation to recognize Bitcoin as a legal tender with the passing of the Bitcoin Law. In El Salvador, individuals can now use Bitcoin through the Lightning Network to purchase everyday goods such as an egg sandwich at McDonalds. This act has been revolutionary for the legitimation of cryptocurrencies and will be an influential data point for other nations to look at as they evaluate their options in the future. This event has brought forth the question of when other countries will adopt a similar policy and how different cryptocurrencies will shape the payment space in the future.
Bitcoin, which was originally thought of as a “novel token” has not only seen greater global adoption in recent years but an extreme increase in value where today one coin is valued at around $45,000. There is a set number of tokens, so as the adoption of the “coin” as a viable payment technology intensifies, so will the value. This model relates to the topic of the game theory discussed in class. Based on class examples, Game theory can be defined as a framework for providing the mindset to show the strategic behavior of how people make choices, how choices affect others, and how different situations payout. In the context of Bitcoin, there are two aspects of Game theory that are relevant.
The first area of Game theory found in the dynamics of Bitcoin is the prisoner’s dilemma arms race. In this situation, the earliest adopter of a successful technology will reap the greatest benefit. The hesitancy is that there is no guarantee that Bitcoin will only increase in value as there is a risk to the asset. Each nation faced with the dilemma of integrating cryptocurrencies into their monetary policy has to decide if the reward of early adoption is worth the risk of the asset. The article makes the strong point that the fear of missing out on this financial activity and the opportunity cost of adopting the infrastructure too late will lead to other nations eventually adopting Bitcoin or other cryptocurrencies in the future.
The other aspect of game theory that is present in the global adoption of Bitcoin is looking at the situation as a coordination game where players have a shared goal to coordinate the same strategy. For Bitcoin, each nation will receive a higher payoff as more people adopt the token as viable payment technology. For Bitcoin diplomacy, the payoff matrix is not as extreme as a zero-sum situation, but if nations can coordinate the adoption of the token, it will only increase the confidence and stability of the technology.
The increased adoption of cryptocurrencies by nations across the world is a complex diplomatic issue. On the one hand, both individuals and governments still have reservations about the legitimacy and stability of the currency. But if nations adopt the token too late, there is the opportunity cost of not reaping the full benefit of an increase in value. This circumstance is a truly remarkable case of game theory playing out in the 21st century and has the potential to affect global monetary policy in years to come.