Bitcoin is a game of musical chairs – and the music is stopping – CityAM

This headline might be the single most bullish news story for Bitcoin this year:

“MicroStrategy® (Nasdaq: MSTR), the largest independent publicly-traded business intelligence company, announced that it has adopted Bitcoin as their Primary Reserve asset, purchasing 21,454 bitcoins for $250 million.”

What it means is that 0.1% of all seats in this game have just been occupied – that’s less for you, me, and the company you work for.

Let me explain.

Bitcoin has a game-theoretical angle: the value of Bitcoin, like any other asset, can be explained by Rene Girard’s concept of mimetic desire.

This means that people can desire anything, as long as other people seem to desire it, too. 

Reflexivity (the self-reinforcing effect of market sentiment) explains why price increases trigger a desire for investors to purchase more Bitcoin.

This crowd behaviour combined with Bitcoin’s limited supply has started an inevitable game of musical chairs. And you are playing it, whether you want to or not.

According to game theory, the decision notto buy Bitcoin is just as powerful as the decision to buy Bitcoin: you are taking the view that there will be less demand for Bitcoin in the future, or that other players will also decide not to buy Bitcoin.

If this view is wrong, you will inevitably be worse off than your peers.

No one gets to sit on the sidelines.

Space race 2.0?

Who else are we racing with?

It’s a novelty that publicly-listed companies such as MicroStrategy are entering the pitch.

Still, game-theorists have been playing a hypothetical prisoner’s dilemma when it comes to nation states for quite some time: central banks could start accumulating this new digital asset to complement their gold reserves.

Imagine a country like Switzerland announcing tomorrow that it has allocated 1% of its reserve assets to Bitcoin (For reference, Microstrategy’s Bitcoin allocation has been north of 50% of their cash reserves).

How many countries would follow suit?

Bear in mind that any country that does not imitate Switzerland is either taking a view against Bitcoin or will be a late adopter and eventually worse off.

Mimetic desire among sovereign wealth funds coupled with Bitcoin’s reflexive value characteristics could give the word FOMO a whole new meaning.

(According to the Nash equilibrium, there is also the First-Quadrant-Scenario in which all countries bet that no central bank ever acquires Bitcoin as a reserve asset and all maintain the status quo, and the Fourth-Quadrant-Scenario that all central banks acquire Bitcoin at the same time and sacrifice their monopoly on money. Both scenarios however seem unlikely.)

Prisoner’s dilemma – a white collar view

Microstrategy’s move to acquire 0.1% of the entire Bitcoin supply has accelerated the race by introducing another dimension (next to central bank reserves): corporate balance sheets.

As Bitcoin’s total supply is capped to 21 million, only around 900 more companies would be able to hoard the same amount of bitcoins for their treasuries.

Now that the first domino has fallen, the price of delaying the decision to buy (or not to buy) Bitcoin might soon be too high.

How much longer will it be until corporate treasurers need to justify not insuring their cash reserves against currency debasement and other macroeconomic risks?

The pace has increased:

Paul Tudor Jones removed career risk for hedge fund managers from investing in Bitcoin.

MicroStrategy removed career risk for CFOs from putting company treasury into Bitcoin.

Corporate FOMO could be the real driver for Bitcoin’s price in the coming years.

As per latest figures, Microstrategy’s peers in the NASDAQ-100 alone are sitting on almost $1tn in cash reserves.

Ok, Boomer

In the retail investment sphere, digital native millennials have been the first movers tochoose Bitcoin as an insurance against unprecedented Quantitative Easing.

They are traditionally tech-savvy and quicker to move than corporations or central banks.

Companies like Mode provide secure and seamless access to Bitcoin which has accelerated adoption over the past years. New features like free and instant Bitcoin transfers make it easier for early adopters to invite their peers to be part of it.

While boomers traditionally have held gold as their favourite reserve asset, recent research* has shown that they are stockpiling Bitcoin in order not to be left out. 

The closing song

It doesn’t matter if you are a central banker, saver, or corporate executive: you too are part of the musical chair game.

Mimetic desire for Bitcoin is a feedback loop in which delaying your decision might be costly.

Saifedean Ammous’ view applies to investors, CFOs and politicians alike:

“This is a historical lesson of immense significance, and should be kept in mind by anyone who thinks his refusal of Bitcoin means he doesn’t have to deal with it. History shows it is not​ possible to insulate yourself from the consequences of others holding money that is harder than yours.” 

Or, as a certain creator of Bitcoin has stated in 2009:

“It might make sense just to get some in case it catches on. If enough people think the same way, that becomes a self fulfilling prophecy.” – Satoshi Nakamoto

Enjoy the music while it’s playing.

Janis is Chief Product Officer at Mode, the UK fintech behind a first-of-its-kind digital banking app that allows users to access GBP, EUR and BTC accounts and grow their digital assets, all in one place. Janis is a passionate fintech & cryptocurrency expert providing thought leadership in online communities and as a regular speaker and panelist. His academic career has brought him to University of St. Gallen, Columbia University in the City of New York, City University of Hong Kong, and Saïd Business School.

*Relevant research can be found here.

The opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of Mode. The content in this article does not constitute advice in relation to any purchase or use of digital assets. Please seek your own legal, tax or investment advice as you deem appropriate.