James Stanley

The Game Theory Case for Bitcoin

Thu 5 January 2017

During a period of only 4 hours today, the value of Bitcoin dropped by more than 30% (8888 CNY down to 6000 CNY). This sparked some discussion at work about what it is that makes Bitcoin worth anything in the first place.

For me, the value proposition of Bitcoin is that it can not be devalued by any government or central bank attempting to stimulate (read: manipulate) the economy.

You might argue that being able to devalue the currency is good for the economy. That may be so, and it may not. W. Ben Hunt argues that adjusting interest rates to stimulate the economy does not help: that it's just like trying to make things look the way they looked during the good times in hopes that the good times will return.

Regardless, my argument is that it doesn't matter whether it is "good for the economy" or not: devaluation of a currency is bad for the people holding that currency. Given a choice between a currency that is regularly devalued and one that can not be devalued, individuals should rationally choose to store their wealth in the one that can not be devalued.

Positive interest rates mean fiat currency is almost always being devalued (the US Dollar inflated over 2000% over the last 100 years). And you're no better off under negative interest rates: they just take your money while it's in the bank.

Bitcoin defends against both of those cases. This brings us to the logical conclusion that, all else being equal, rational actors will move their wealth from fiat currencies to Bitcoin so that it is not inflated away from them.

Of course, all else is not necessarily equal...

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