How Bitcoin Awaits Its Game Theory Moment

I sometimes post on SeekingAlpha (or as I prefer to call it "BoomerAlpha"). I recently tried to post an article about Bitcoin but it got rejected because "it appears to be too speculative" (which is their way to say that you can only post articles that go with the flow). So I decided to post it here - in the hope someone finds it interesting.

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Yes, Bitcoin is technically the perfect store of value. But it’s not enough.

Everyone paying attention knows that Bitcoin possesses the technical attributes to serve as an ideal store of value:

• It's durable, existing on the blockchain, immune to physical decay.
• It's divisible, with one Bitcoin splittable into 100 million parts or "Satoshis."
• It's fungible, meaning each unit is interchangeable.
• It's portable, easily transferable digitally.
• It's verifiable, with ownership and transactions confirmed on the blockchain.
• It's scarce, with a capped supply of 21 million.

However, this doesn't guarantee Bitcoin's future as a new, global reserve asset. New cryptocurrencies can be, and have been, created with similar or enhanced features.

What Bitcoin must yet establish is its credibility as a reserve asset. It needs a proven track record to earn global trust in this role.

As of now, it hasn't achieved this. But, from my perspective, this could be on the verge of changing rapidly.

What Bitcoin needs is institutional adoption.

Bitcoin has emerged as one of the best performing assets over the past decade, escalating from a market capitalization of merely a few million dollars to today's ~1.3 trillion USD. This growth was fueled primarily by retail investors, companies like Microstrategy, and smaller nation-states such as El Salvador or the Central African Republic.

Should Bitcoin evolve into a recognized global reserve asset, we can assume it would need to match gold's market capitalization of 13 trillion USD. Achieving this level of growth would require the engagement of institutional investors, including:

1. Major countries legalizing Bitcoin and/or incorporating it as a reserve asset and store of value.
2. Prominent multinational corporations adopting Bitcoin as a cash alternative.
3. Pension funds and other institutional investors.
4. Ultra High Net Worth individuals engaging with Bitcoin.

A broader institutional adoption is essential for Bitcoin's maturation and establishment as a global reserve asset. There simply is not enough money with retail investors to move Bitcoin to the level it needs to be at to justify its role as a global reserve asset.

Bitcoin is a high risk bet… until it isn’t.

Game Theory suggests that in economics, no one can rely on trust or working together with others. Instead, they should expect to always be in competition. This means that people or companies will usually make choices that are best for themselves, even if it might not be good for others. This is because they can't be sure that others won't do the same, so the smart move is to look out for oneself, assuming everyone else will do the same.

When it comes to world currencies used for reserves, the main players are governments and central banks. The question is, why would any of these entities choose to use Bitcoin? Considering that some smaller countries have already started using it, it all boils down to game theory. Right now, buying Bitcoin is pretty cheap for a central bank or a big country. Spending a few billion dollars is nothing compared to, for example, the US's budget deficit, which went up by 21 billion USD in January 2024 alone. For smaller countries like Saudi Arabia or the UAE, investing in Bitcoin wouldn't be too hard and wouldn't really hurt their budgets.

Compared to its cost, the benefits of adopting Bitcoin could be massive. If Bitcoin ends up being the top choice for a global reserve asset, the countries that start using it early could gain a lot, no matter their current economic strength or military power. This is a bet that becomes more attractive as Bitcoin recovers yet again from a long bear market and hits new ATHs.

More importantly, if an actor decides to adopt Bitcoin as a reserve asset, other actors will have no choice but to do exactly the same. If they don't, they risk missing out on being part of the new global reserve asset.

In other terms, as soon as a significant government or central bank (or major financial institution) adopts Bitcoin publicly, the rest will likely follow. At that stage, it wouldn't matter whether they previously thought Bitcoin was worthless or even harmful. Choosing not to follow would be illogical.

This is the main reason I think Bitcoin's future price movement will be unlike anything we've seen before.

I am not a fan of technical analysis, and despite being bullish on Bitcoin I do not find any value in looking at the popular Bitcoin Rainbow Price chart. I see it as a meaningless chart that merely tracks past behavior of Bitcoin and had to be redrawn when Bitcoin fell under the predicted minimums in 2022.

I believe that if Bitcoin matures to a global reserve asset, its rise to a 10+ Trillion USD asset will not follow the scale of the rainbow chart, but rather be meteoritic. The reason is, as we have just seen, game theory. All institutions will have no choice except to enter Bitcoin at the same time, causing its price to rapidly grow to a new market capitalization reflective of its new status.

What a catalyst could look like

For game theory to kick in, prompting major institutions to jump into Bitcoin, it only takes one significant catalyst. The entry of one reputable player, or a group of credible economic players, into the Bitcoin market could set off a global race towards Bitcoin.

While I usually steer clear of making predictions, I suspect that this catalyst may originate from governments that are either non-aligned or only partially aligned with Western interests.

It's easy for us in the West to be cocooned by our media, focusing almost exclusively on our own part of the world. Yet, the global landscape is arguably more fragmented than ever. The broad condemnation of Russia, for example, is actually quite confined to the US, Europe, and their close allies upon closer inspection. Even nations traditionally seen as Western allies, like those in the Gulf or Israel, maintain robust diplomatic relations and some level of trade with Russia. Not to mention that BRICs countries are actively looking at reducing their dependence on the US dollar as a currency for trade, and China and Russia are now trading in Yuans, instead of Euros and US dollars.

Ultimately, Bitcoin offers an alternative not just to the USD, as a reserve currency, but also to gold, as a central bank reserve asset. It also presents an opportunity for smaller nations to gain a strategic advantage. In an ever-fragmented world, Bitcoin could be very appealing for countries looking to gain a competitive edge and reduce their dependence from the West.

Consider El Salvador under President Nayib Bukele, which has embraced Bitcoin as legal tender and started incorporating it into its reserves. Though Bukele's recent visits to Gulf countries like Qatar might not directly relate to Bitcoin, they could signal the beginning of a new strategy and / or counseling over adopting Bitcoin as legal tender in Gulf countries.

Risks to my thesis - the bear case

The biggest uncertainty surrounding Bitcoin remains its potential lack of adoption by key financial players or governments. The possibility exists that no major economic entity will ever take the lead in embracing Bitcoin. Currently, mainstream economic circles and significant financial institutions largely dismiss Bitcoin, as highlighted by the ECB's recent declaration that "Bitcoin is not suitable as means of payment or as an investment" (notably, Bitcoin's value has increased 30% against the USD since that statement).

Should Bitcoin not gain institutional support, it risks remaining akin to an online gambling platform, with its value hovering around or below its current all-time highs.

Conclusion

• Bitcoin possesses the technical attributes to serve as an ideal store of value, but it needs institutional adoption to establish credibility as a reserve asset.
• We could be nearing a catalyst event, such as a country deciding to adopt Bitcoin to secure a competitive edge and reduce their dependence on the USD.
• Game theory suggests that once a significant government or central bank adopts Bitcoin, others will have no choice but to follow, leading to rapid growth in Bitcoin's price and market.
• Bitcoin is currently trading near its all-time high. I consider Bitcoin a speculative investment, yet one that's still worth considering due to its substantial potential for gains.

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Needless to say - this is not financial advice in any way shape or form (or country).