Game Theories of Cryptocurrency Investing I

WHERE DOES GAME THEORY MEET CRYPTO INVESTING?

TABLE OF CONTENTS

  • What is the Game theory (concepts)?
  • Game theory and Cryptocurrency Investing.
  • The greater fool theory.
  • Cost-Benefit Analysis.
  • Basic Game theory metrics.

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TL; DR(KEY POINTS)

  • Game theory is the study of strategies, decision-making, and how it affects the parties involved in the game(a situation with two independent parties involved in a decision-making process where the two parties do not influence the outcome…).
  • Game theory is used in Social sciences, Mathematics, Engineering e.t.c.
  • Crypto investing is populated and game theory could give an upper hand in making investment decisions.
  • The greater fool theory insinuates how an individual who buys an overvalued asset is a greater fool in comparison to who sold it to him after buying at a much lower price.
  • Cost-Benefit Analysis is a systematic approach to estimating the strengths and weaknesses of alternatives.
  • Metrics like market sentiment, ecosystem rotation, market cycles can be used to formulate decisions.

WHAT IS GAME THEORY

from giphy.com

Simply put, Game theory is the study of strategies, decision-making, and how it affects the parties involved in the game.
What game? FIFA? CODM?

A game is any situation with two independent parties involved in a decision-making process where the two parties do not influence the outcome.

In Game theory, we are concerned about how the participants react to the situation and their stakes in the game(what they have to win or lose) and this helps us analyze their decisions or gives insight into what might be their course of action.

Game theory is used in the following;

  • Social Sciences.
  • Mathematics.
  • Biology.
  • Economics.
  • Engineering e.t.c.

This publication focuses on the effect of game theories on cryptocurrencies, however, Investopedia and Britannica have good resources to learn about game theory and how it affects general finance.

  • What Is Game Theory?
  • game theory | Definition, Facts, & Examples

You could learn more about game theory, in general, using this video.

https://medium.com/media/54db93af127286ca94f75e0fdf2f827f/href

GAME THEORY AND CRYPTOCURRENCY INVESTING

Cryptocurrency investing provides a whole different atmosphere. Unlike other financial markets, anyone, anywhere at any time, in normal circumstances, has access to cryptocurrencies and a stake in determining the value of the underlying asset. This “populated interference” with the market increases the complexity associated the predicting the price of an asset.

However, since humans have general behavioral patterns, knowledge of game theory still helps with the prediction of the value of an asset based on how market participants react to the fundamentals of the asset.

An example is in cases of FUDs(fear, uncertainty, and doubt) like that occurring with the recent Russia-Ukraine which has market participants worried about how it would affect the price of their assets and often refer to past occurrences of war.

THE GREATER FOOL THEORY

Generally, assets are intrinsically valued(worth is assumed) and assets are bought and sold either on profits or loss.
The greater fool theory insinuates how an individual who buys an overvalued asset is a greater fool in comparison to who sold it to him after buying at a much lower price.

In the case of crypto investing, with a lot of projects out there, it’s really hard to predict the intrinsic value of an asset, as more often than not, there’s a lot of competition in ecosystems.

Technical and fundamental analysis are good fortresses talking about the value of an asset and trying to avoid being the greater fool.

COST-BENEFIT ANALYSIS(CBA)

from giphy.com

Wikipedia defines CBA as “a systematic approach to estimating the strengths and weaknesses of alternatives”.

If we have two things to pick from, cost-benefit analysis weights what it makes and takes to go for one of the options, more like the fundamental risk-reward analysis.

A good scenario of CBA in crypto investing Choosing between two Defi projects to buy on Solana. You could weigh the cost(the amount you’re investing relative to your portfolio or pocket size) to the benefits(the possibility that your token increases in price and the expectations).

Good CBA never goes wrong in investing in general.

BASIC GAME THEORY METRICS FOR CRYPTO

  • Market Sentiment.
  • Market Cycle.
  • Ecosystem Rotation e.t.c.

Question: Is DeFi a zero-sum game? How does everyone get high interaction incentives?

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Disclaimer: This is educational content for Fundamental Analysis purposes and NOTHING in this publication should be considered Financial Advice.

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