Russia & Bitcoin Game Theory

Every passage, on the record.

1. 00:00Event

   Russia has just, as of about 15 minutes ago, started its military advance on the Ukraine, and the episode is going to cover Bitcoin, game theory, and specifically what is happening with Russia at the moment: the options it has available to acquire Bitcoin or not, the game theory involved, and what that means for Bitcoin, other nation states and adoption down to the individual level.

2. 00:46Reference

   Game theory was probably made popular by John Nash, who was the character behind the true story behind A Beautiful Mind, a crazy genius who understood a lot of things.

3. 00:46Reference

   He wrote the paper and then did the talk, Ideal Money, which is not a precursor to Bitcoin but describes the system very much like Bitcoin, in the sense that it is pricing things in energy and that money should be used as a measuring stick, like a kilowatt or a foot or a meter.

4. 01:33Claim · condensed

   Nash had the idea to implement an international CPI, but found that it would be politically corruptible, so he was searching out a solution like Bitcoin that could be kept out of the hands of bad actors and away from manipulation from the state or the nation.

5. 01:33Claim

   Game theory studies the process of strategic interactions between two or more players in a situation where the outcome for each participant depends on the action of all.

6. 02:07Claim · condensed

   To be the best you have to think about what everyone else is going to do while knowing at the same time that they are thinking the exact same thoughts about you, and you converge on the Nash equilibrium, the point where it becomes best for all participants to act a certain way.

7. 02:07Reference

   You have to come to what John Nash eventually found out was the Nash equilibrium, where it's going to be best for all participants to act a certain way, and then they converge on that point.

8. 02:47Idea

   For our purposes, money is energy. We understand that money represents energy stored, accessible energy, and the energy equivalent of a good can serve as a satisfactory approximate for a utility function, because we're trying to figure out what individual actors are going to do to serve them best based on the amount of utility a certain action will bring.

9. 03:22Reference

   I have to remember what Satoshi came up with. I can't remember if it was in the white paper or during his interactions on the forums, but the price of any commodity tends towards the cost of production.

10. 03:22Claim · condensed

    The price of any commodity tends towards the cost of production, so if we can accurately price the cost of production we can create a metric for value, and that metric is what feeds into whether the Bitcoin network's incentives align so everyone acts in their own self-interest while also serving the network.

11. 04:06Analogy

    The alternatives to having money that is less hard than those around you is staggering: you're going to be operating from a significant point of disadvantage. It's like trying to attack uphill. It's going to put you in a significantly worse off place.

12. 04:06Reference

    This is where Gresham's law comes from, which is: if all people want better money, all actors inside of a system want better money.

13. 04:41Claim · condensed

    Better money means money that is more durable, more scarce, more fungible and more transportable; the better those attributes are, the more people want to hold on to it, and Gresham's law states the tendency for bad money to drive out good, so people spend the worse money first.

14. 05:15Analogy

    They're going to try and get rid of that first like a game of hot potato. You're not going to want to hold on to that when an alternative exists, because that is going to better store your energy.

15. 06:17Claim · condensed

    If Bitcoin adoption increases, the velocity of fiat will increase, because as soon as individuals get their dollars they will want to exchange them as quickly as they can for the stronger alternative, which is Bitcoin.

16. 07:20Claim · condensed

    It becomes this game of hot potato: you want to get out of fiat as quickly as you can and hold as much Bitcoin as you can, because you're not going to want to trade Bitcoin for something worse that is losing value as fast as Bitcoin is gaining it.

17. 07:51Claim · condensed

    Businesses can accelerate hyperbitcoinization by refusing to accept a fiat that is losing value too quickly, which forces the individuals who want to interact with that business to go out and acquire Bitcoin themselves.

18. 08:25Claim · condensed

    A company that decides to only accept Bitcoin accelerates the snowball effect more than simply trading its own devaluing money for Bitcoin, but either path eventually increases fiat velocity and therefore inflation.

19. 09:00Prediction · condensed

    The Federal Reserve cannot continue to allow inflation to creep higher and higher, and it will only accelerate as more individuals adopt Bitcoin, because rising adoption both drives inflation up and starves the state of the inflation revenue it depends on, forcing it to inflate even more to receive the same benefit it had before.

20. 10:04Quote

    If an escape valve exists, people will find it.

21. 10:04Reference

    Like the lady that runs the ECB, Christine Lagarde, she said, if an escape valve exists, people will find it.

22. 10:04Analogy

    That is exactly what Bitcoin is. It is an escape valve from governments, from individuals, from people who would wish to manipulate the energy supply. It is an escape from the ability to do that because they can't.

23. 10:41Idea

    Now we're starting to understand the game theory of how hyper Bitcoinization comes upon us.

24. 11:19Claim · condensed

    Any economic activity requires energy, so proof of work becomes the basic opportunity cost for any economic activity: the question is whether that activity is more profitable than contributing electricity to the miners defending the network.

25. 13:04Claim · condensed

    Bitcoin participants mutually agree, because they are forced to by the incentives of the game, to act according to rules that are simple and easy to understand, and the consequences of breaking them are even clearer.

26. 13:36Claim · condensed

    A 51 percent attack is highly improbable at this stage, not impossible, but the network has grown so large that building the required hash power to occupy 51 percent of it would be incredibly complicated. Who knows, but it seems highly unlikely at the moment.

27. 14:11Claim · condensed

    Even a coalition of nation states that acquired enough hash power for a 51 percent attack would find it more profitable to follow Bitcoin's rules than to break them, because Bitcoin's value comes from its immutability, and if the ledger were shown to be manipulable the network's value would go to zero almost immediately.

28. 14:47Quote

    You would be pushing all of this economic energy into this endeavor to do nothing but explode your own, the bounty of your effort. As in you get nothing for a giant expenditure.

29. 15:30Claim · condensed

    Every country will eventually want to accumulate Bitcoin without any other country knowing, because revealing that you find Bitcoin valuable alerts other countries, and since Bitcoin has absolute scarcity the only way to fulfill new demand is for price to increase.

30. 16:11Claim · condensed

    A nation state can acquire Bitcoin by devaluing its own fiat, effectively having the population buy the Bitcoin for the state: the population's stored energy in savings gets diluted, and the state takes the profits of that dilution to purchase Bitcoin.

31. 16:43Claim · condensed

    Large scale nation-state purchases of Bitcoin on the open market, attempted over time, would become more and more evident on a public ledger, which is why buying on exchange is not an ideal path for a state trying to accumulate secretly.

32. 17:59Reference

    It was recently reported by Fidelity Asset Management, when they came out with a paper on Bitcoin, and they talked about this insurance model of nation states and Bitcoin.

33. 17:59Claim · condensed

    Under the insurance model, even a country that doesn't believe the Bitcoin adoption thesis will be forced to acquire some Bitcoin as a form of insurance, because countries that secure Bitcoin today will be disproportionately better off than their peers if adoption keeps increasing.

34. 18:35Reference

    The hands of nation states will be forced by others, like El Salvador planting a flag in the ground and saying we are going to do this.

35. 18:35Prediction

    The purchase and custody of Bitcoin at a nation-state level is only going to get quicker and quicker from here; this really is the moment of adoption for nation states.

36. 19:38Prediction · condensed

    In the short term, people are going to flee to the most liquid asset, which right now is the US dollar and not Bitcoin, so the Bitcoin price will drop even though Bitcoin holds the least counterparty risk.

37. 20:12Quote

    This is the time that Bitcoin was built for.

38. 20:12Claim · condensed

    Large money that has come into Bitcoin over the last 24 months still plays by the conventional rules of fleeing to the most liquid, most stable asset in times of uncertainty, which is the US dollar, not Bitcoin.

39. 20:46Prediction · condensed

    Wars are extremely bullish for Bitcoin further out, because financing them requires more money creation, and the longer a war continues the more inflation will have to pick up to fund it.

40. 21:19Analogy

    This is not medieval England where you had to pay taxes in order to fund the war. Now we can just fund the war and then discreetly suck the energy out of the room for the entire country, for everybody that contributes to the economy, through inflation.

41. 21:50Prediction · condensed

    The US are going to use their go-to of imposing economic sanctions; they're going to cut Russia off the SWIFT system, so Russia will have to move to an alternative for exchanging goods with other countries.

42. 22:21Claim · condensed

    Russia has two choices once cut off from Swift: adopt Bitcoin or come up with some other means of exchanging goods with other countries, and adopting Bitcoin itself breaks into three paths: exchange energy for Bitcoin, mine Bitcoin, or straight up buy it.

43. 22:54Claim · condensed

    If Russia exchanges energy for Bitcoin with a partner like China, pricing the energy in Bitcoin and putting Bitcoin on the balance sheet, it can transact without using the Swift system, at the cost of losing energy out of the country.

44. 24:01Quote

    The Bitcoin network does not know that it is Russia transacting with China. You can't sanction the network.

45. 26:17Claim · condensed

    Dealing with China in Bitcoin alerts every other nation that Russia is entering the Bitcoin space, setting off a chain reaction of countries buying insurance Bitcoin, because the logical response to seeing a fixed-supply asset accumulated quickly by a rival is to take out insurance yourself, even at small cost.

46. 29:55Claim · condensed

    Building out Bitcoin mining infrastructure increases domestic economic productivity, because the rigs, stations and buildings need a skilled labor force to transport, transfer and build them, creating jobs outside the Bitcoin network itself.

47. 30:33Claim · condensed

    Mining gives a country motivation to find and tap untapped energy resources and makes the economics of building new power plants make sense, because proof of work provides a base measuring stick for what to do with that energy.

48. 31:06Claim · condensed

    Mining lowers counterparty risk compared to exporting energy, because a country no longer has to rely on unpredictable foreign buyers, and the Bitcoin network cannot regulate or discriminate against where the energy powering it comes from.

49. 31:37Quote

    This is the number go up technology in action.

50. 31:37Claim · condensed

    As more electricity and hash come onto the network, it gets harder to manipulate the ledger, which makes Bitcoin more censorship resistant and more valuable, which in turn drives further adoption.

51. 32:47Prediction · condensed

    Since El Salvador embraced Bitcoin, nation-state adoption has become a race, and that race is only getting quicker and quicker.

52. 33:18Idea

    The pros are that essentially the Bitcoin is free for the government. All they have to do is steal it from the people, siphoning the energy off through inflation and then getting control of the Bitcoin for free; the cost is passed on to the holders of the currency.

53. 33:18Claim · condensed

    Buying Bitcoin outright means printing fiat to fund the purchase, which makes the Bitcoin essentially free for the government, because the cost of debasement is passed on to the holders of the currency, while the state acquires the ultimate measuring stick of energy.

54. 35:24Claim · condensed

    If a state buys Bitcoin with printed money and the price later falls, it still wins on the export side from having devalued its currency, so the real downside is only the opportunity cost of what else it could have done with that printed money, such as buying gold.

55. 35:55Claim · condensed

    If Russia doesn't buy Bitcoin and the price falls, it only misses the opportunity cost versus alternative stores of value like gold, and holding US Treasuries is not a credible option while at war with the country imposing the sanctions.

56. 36:28Claim · condensed

    If Russia doesn't buy Bitcoin and the price rises, it loses on two fronts: it has no way to capture the capital flight that happens once people understand there is an exit, and it loses skilled people and energy to jurisdictions where Bitcoin's rewards are embraced.

57. 37:09Claim · condensed

    The play for Russia, and really for every other country, is fairly simple: accumulate as much Bitcoin as you can without letting any other nation know that you can or that you are doing it, and once the information is out, keep accumulating as much as you can regardless.

58. 37:09Quote

    To accumulate as much Bitcoin as you can without letting any other nation know that you can or know that you are doing it.

59. 37:55Prediction · condensed

    There is no way to satiate Bitcoin demand once a major nation-state makes a play, because the difficulty adjustment means supply stays exactly the same as demand increases, and we have never seen a parabolic curve like the one that will happen when this takes off.

60. 38:37Claim · condensed

    The answer to every angle that Bitcoin's nation-state game theory poses, whether you're worried about capital flight or about a rival getting involved, is the same: accumulate more Bitcoin than anyone else, because you can't kill it, so you have to adopt it and learn to live by it.

61. 39:07Prediction · condensed

    Eventually Bitcoin will be the global reserve asset.

62. 39:39Quote

    Let's take a small amount of risk now to guarantee ourselves an outsized advantage moving forward.