(From the archives: first published 4/9/2024)
Bitcoin, often hailed as digital gold, operates on a foundation of meticulously designed incentives that align participants in a decentralized network. At its core, Bitcoin addresses the "tragedy of the commons" - a scenario where shared resources are overexploited due to misaligned incentives. Unlike fiat currencies, where central banks can print money at will, diluting value, Bitcoin's fixed supply of 21 million coins creates a scarcity that rewards long-term holders and discourages wasteful behaviour. This structure fosters cooperation among 8 billion potential users, turning what could be a zero-sum game into a collective benefit. But when nation-states enter the fray, the game theory escalates, introducing geopolitical tensions, custody challenges, and profound investment implications.
Nation-states are increasingly viewing Bitcoin through a strategic lens, akin to how they once competed for gold reserves. El Salvador, under President Nayib Bukele, exemplifies this shift by adopting Bitcoin as legal tender and mining it using volcanic energy. Bukele's approach - mining Bitcoin and stacking it on the national balance sheet - demonstrates rational game theory: secure a scarce asset early to gain an edge. If Bitcoin appreciates as expected, nations like El Salvador could leapfrog economically, funding infrastructure without debt. However, this creates a prisoner's dilemma for other countries. If the U.S. or China ignores Bitcoin, they risk falling behind; if they adopt it aggressively, they could dominate the network.
Mining introduces another layer of complexity. Bitcoin mining is the fiercest competition on Earth, open to anyone with electricity and hardware. As private miners face volatile revenues - exacerbated by halvings that reduce block rewards - many are pivoting to AI for predictability. This vacuum could be filled by state-owned enterprises, subsidizing mining as critical infrastructure. Governments might use "free" energy from renewables or hydropower to secure transaction inclusion and block rewards. Yet, this raises risks: state miners could prioritize ESG compliance, accept off-chain payments, or censor transactions, undermining Bitcoin's neutrality. In a high-fee environment, spammy data (like inscriptions) could clog blocks, delaying legitimate transactions. Game theory suggests short-term corruption is possible - nations might collude or attack rivals - but long-term incentives favour cooperation. A government holding Bitcoin on its balance sheet has skin in the game; devaluing the network harms its own reserves.
Custody amplifies these tensions. Bitcoin's mantra - "not your keys, not your coins" - applies universally, but nations are collectives, not individuals. How does a government securely hold keys? Custodians introduce vulnerabilities: keys could be controlled by a few officials, ripe for corruption or theft. Imagine a president front-running national adoption by buying Bitcoin personally, then fleeing with the treasury. Chaos ensues when institutions fumble self-custody, as seen in historical hacks like Mt. Gox. For nations, proof-of-work extends beyond mining; it demands rigorous education and redundancy. Failures here could lead to "finding out" after "fooling around," with lost funds benefiting no one - except perhaps by reducing effective supply and boosting value for others.
These nation-state dynamics ripple into general investment incentives. Bitcoin rewards patience over speculation. The "stay humble and stack sats" ethos encapsulates this: accumulate Bitcoin steadily, avoiding trades that erode wealth through fees and taxes. Historical traders like Jesse Livermore, the world's best short-seller, died bankrupt, underscoring that "the money is made in the sitting." In fiat systems, broken money incentivizes spending and debt, inflating assets like stocks through liquidity floods. Regulators and insiders game this casino, relying on privileged information for edges - think Nancy Pelosi's outperforming trades.
Bitcoin flips the script. As a non-zero-sum game, it aligns incentives: individuals benefit from network growth, front-running institutions by stacking early. Concentrated bets in superior assets like Bitcoin accelerate wealth ascent, per Maslow's hierarchy - securing base needs enables spiritual growth. Diversification suits the masses for safety, but extreme wealth (e.g., Bezos or Musk) stems from focus. On a Bitcoin standard, low time preference prevails: save more, spend less, as value compounds over time. High fees deter frivolous transactions, favouring meaningful exchanges - reputational capital or barter supplements, reducing overall velocity.
Yet, risks persist. Nation-states could impose unrealized capital gains taxes, skewing incentives and eroding compounding. This underscores Bitcoin's black-market roots: permissionless, uncensorable money thrives in shadows, obsoleting coercive structures. Ultimately, Bitcoin fosters a peaceful revolution, where aggression yields nothing - wealth extraction demands voluntary trade. As nations play this game, individuals must navigate wisely: self-custody, long-term holding, and vigilance against encroachment.
In this evolving landscape, Bitcoin's incentives unite humanity, transcending borders. Nations that adapt thrive; laggards falter. For investors, the lesson is clear: embrace scarcity, align with truth, and let the game theory unfold.
NB: This video is for information and entertainment purposes only and should not be considered investment advice.