Abstract
We utilize optimization methods to determine equilibria of cryptocurrencies. A core group, the wealthy, fears the loss of assets that can be seized by a government. Volatility may be influenced by speculators. The wealthy must divide their assets between the home currency and the cryptocurrency, while the government decides the probability of seizing a fraction the assets of this group. We establish conditions for existence and uniqueness of Nash equilibria. Also examined is the separate timescale problem in which the government policy cannot be reversed, while the wealthy can adjust their allocation in reaction to the government’s designation of probability.
Highlights
IntroductionCryptocurrencies have evolved into a new speculative asset form that differs from others in that most represent no intrinsic value; they cannot be redeemed by a financial institution for any amount [1]
The wealthy must divide their assets between the home currency and the cryptocurrency, while the government decides the probability of seizing a fraction the assets of this group
Cryptocurrencies have evolved into a new speculative asset form that differs from others in that most represent no intrinsic value; they cannot be redeemed by a financial institution for any amount [1]
Summary
Cryptocurrencies have evolved into a new speculative asset form that differs from others in that most represent no intrinsic value; they cannot be redeemed by a financial institution for any amount [1]. If people gradually become more comfortable with cryptocurrencies, as they did with internet shopping, it is likely that the market capitalization could grow to a few percent of the $75 trillion Gross World Product (GWP) as the fraction of the world’s savings that is under threat by government seizure, high inflation, etc., is certainly at least this fraction (as discussed further below) At this point, large price changes in cryptocurrencies would likely have an impact on the broader markets. There is a probability, p, that the government can initiate policies that will deprive citizens of a fraction k of their wealth, e.g., by printing money This possibility is noted by the wealthy, W, who must make a decision on the fraction of their assets, denoted 1 − x held in the home currency and the remainder, x, in cryptocurrency, which presents risks of its own due to the volatility.
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