Debunking the Bitcoin Nation-State Theory

Debunking the Bitcoin Nation-State Theory

1 year ago

There's a lot of enthusiasm and hype about it in the Bitcoin community, particularly when Bitcoin-related news on the national level breaks — but is it all smoke and mirrors?

Debunking the Bitcoin Nation-State Theory


One of the Bitcoin community's favorite narratives is that of the Bitcoin Nation-State Theory (or game theory of nation-state adoption). There's a heap of results if you type it into Twitter:

There's a lot of enthusiasm and hype about it in the Bitcoin community, particularly when Bitcoin-related news on the national level breaks. But is it all smoke and mirrors, or is there any substance to it? In this article, we look at:

  • What is the Bitcoin nation-state theory exactly? Who is arguing in favor of it?
  • How does the current monetary system fit in with this theory?
  • What assumptions is the Bitcoin nation-state theory based on?
  • How realistic is the Bitcoin nation-state theory?

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What Is The Bitcoin Nation-State Theory (and Who's Shilling It)?

The ELI5 version of the theory is:

Nations will develop FOMO just like retail (and institutional) investors and sooner or later ape into Bitcoin.

A visual explanation of it is here:

The theory caught on, particularly after El Salvador accepted BTC as legal tender. It allowed the crypto industry to dream big. For example, Samson Mow, CEO of game developer Pixelmatic, said (annotations by the author):

"The game theory around Bitcoin will drive nation-states to compete for Bitcoin acquisition and it will most likely be in the form of mining it. The second-order benefit will be that Bitcoin will lead more nation-states to seek energy independence in order to ensure their Bitcoin mining operations are unable to be disrupted by externalities."

Another hit in the Bitcoin community was a report by Fidelity, one of America's biggest retirement funds, saying:

"We also think there is very high stakes game theory at play here, whereby if bitcoin adoption increases, the countries that secure some bitcoin today will be better off competitively than their peers. Therefore, even if other countries do not believe in the investment thesis or adoption of bitcoin, they will be forced to acquire some as a form of insurance."


"In other words, a small cost can be paid today as a hedge compared to a potentially much larger cost years in the future."


"We therefore wouldn't be surprised to see other sovereign nation-states acquire bitcoin in 2022 and perhaps even see a central bank make an acquisition."

Central banks buying bitcoin, now we're talking!

But why would countries even develop this FOMO?
One idea is that BTC is better money than fiat and will therefore draw the attention of nation-states as their fiat currencies devalue over time. For example, Fidelity also concluded that investors looking for digital assets as money would "naturally choose the one with the largest, most secure, most decentralized, and most liquid network."
Another contributor to this narrative is the attempt at de-dollarization by BRICS countries, specifically Russia. Since being hit by massive financial sanctions, Russia has accelerated its efforts to wane itself of the greenback asap. That is music in the ears of Bitcoiners:


  • Bitcoin nation-state theory is the idea that nations will FOMO into BTC.
  • They might do so because BTC is harder money than fiat and because they want to get off the dollar.

How Does the Current Monetary System Fit in With Bitcoin Nation-State Theory?

To understand if the theory could play out, we have to understand how the current system works. Then we look at how this ties in with Bitcoin.
Remember the equivalencies between crypto and fiat:

Current fiat payment ledger (e.g. Fedwire) = Crypto payment ledger (e.g. Bitcoin)

Current fiat currencies (e.g. 1 USD) = Cryptocurrencies (e.g. 1 Satoshi)

The current monetary system is debt-based. Like some blockchain ecosystems, fiat currencies have an unlimited total supply — they can always mint new fiat tokens, aka print currency. In charge of the currencies are the central banks, which are equivalent to the controlling majority of a blockchain ecosystem. They can help finance the government’s debt by printing new currency.
The government takes on debt to finance projects and pay for services like healthcare, national defense, education, etc.. But the government has an incentive to overspend and take on debt. When debt is still small, the government could save to bring down the cost of financing it. But when it gets too big, it is easier to mint new "fiat tokens."
At some point, the debt becomes too big. If it's in another currency, the government can default on it. However, that's not good for its credit rating and will make future debt financing harder. If the debt is in its own currency (say U.S. debt in dollars), the government simply "expands its fiat token supply."

The US M2 money supply (or the U.S. token circulation, if you prefer crypto terms)

But where does Bitcoin fit in here?

Bitcoin is a decentralized payment ledger. The United States has a payment ledger called Fedwire. That's the centralized register where banks settle their payments. The eurozone has its own. As has every other country. Bitcoin is simply a decentralized version, which is not controlled by a central bank.

If you think Bitcoin will become important for nation-states, you assume they will have an interest in using this payment ledger.

So let's see why they could be.


  • The current system is debt-based. In crypto terms, the central banks can mint unlimited fiat tokens to finance their debt.
  • Bitcoin is a decentralized alternative without a central bank. Nation-states might become interested in using it.

Why Would a Nation Start Using Bitcoin?

Bitcoin Magazine covered potential strategies of nation-state adoption in a strategy article. There are four types of fiat currencies:
  • The hegemons: the dollar and to a degree the euro.
  • The minor players: the Swiss franc and the yen.
  • The vassals: the Indian rupee, the Russian ruble and almost every other currency.
  • The excluded ones: currencies of sanctioned countries like Iran, Venezuela, and North Korea.
Interestingly, the distribution is similar to crypto. You have one hegemon (BTC/USD), a minor second hegemon (EUR/ETH), a couple of minor specialized players (alternative L1s), vassals (shitcoins) and something like memecoins/meme currencies.
According to Bitcoin Magazine, the excluded countries (with "meme currencies") would be most interested in acquiring BTC. After all, they cannot use the hegemon's (America's) payment ledger and doing business in their own currency is very difficult since no one wants a "meme currency."
The vassals could also be interested since they are fed up with the hegemon dictating the rules of the game and forcing its "fiat tokens" onto them. They would much rather trade in an independent store of value. This used to be gold, but maybe BTC can fulfill this role now?
The article admits it doesn't see how minor players would abandon the existing system, but presumably, at some point, the incentive would be big enough to FOMO into BTC to hedge your bets.
Furthermore, countries — realizing their fiat currencies are only devaluing and never the opposite — could simply "mint new fiat tokens" (print currency) to buy BTC and acquire that hard money. Bitcoin would be the equivalent of a desirable digital commodity — a digital store of value.
Finally, countries could simply become fed up with using only one payment ledger and its currency. For example, most of the world's oil trade is currently settled in dollars. This petrodollar system is a central reason why the USD is the global reserve currency. But countries like Russia and China, which are not exactly friends with the U.S., would prefer to settle the oil trade in their own currency to retain more control over trade.

Maybe an independent and decentralized ledger like Bitcoin could be an alternative?

All of this rests on two assumptions:
  1. BTC is the best collateral.
  2. Everyone wants to use that collateral.

If not for hyperbitcoinization, then at least for some diversification. Let's look at how realistic these assumptions are.


  • All countries except for the financial hegemons have a degree of interest in using alternative currencies and payment ledgers.
  • As a digital collateral, Bitcoin is an interesting alternative particularly for weaker currencies excluded from the current system.

The Problems With the Bitcoin Nation-State Theory

The game theory behind BTC adoption on a national level sounds good. It sounds intuitive. But it is based on several unrealistic assumptions that are more fitting for retail and institutional investors, and not for governments. It errs particularly in one regard:

Individuals and companies/funds maximize for profit. Governments maximize for power and control.

That is why the entire “FOMO for profit” idea is based on a false premise.

However, there are ways in which the Bitcoin network is interesting to nation-states.

Let's look at where the theory gets it wrong and where right.

Assumption: excluded countries like Iran and Venezuela could adopt Bitcoin, for example, to sell commodities.
That has already been proven to be partially false. Yes, Venezuela's citizens adopt BTC due to the country's hyperinflation. But the government actually introduced its own cryptocurrency called petro, which is backed by oil. Similarly, Iran has a significant mining industry. The country accounts for 4.6% of miners worldwide. However, because miners took a toll on its dilapidated power grid, the government has cracked down on mining, and Iran's hash rate fell from 6.9% to 0.2% over only a few months.

This proves two points.

First, excluded countries always prefer payment structures they can control. For instance, the geopolitical pals of Iran and Venezuela may facilitate trading oil against a basket of currencies. Why would these countries, which are notoriously short on cash, prefer a volatile asset like BTC? Even if they cannot control a hypothetical "Chinachain," there might be financial incentives to using that over Bitcoin.
Second, even if countries do covertly acquire BTC through mining (we'll get to that in a bit), there are practical problems. Like an overloaded power grid in the example of Iran.
Assumption: vassals like Russia see BTC as an exit opportunity.
It's true that Russia has been toying with facilitating Bitcoin mining on a national level, like using flare gas to mine BTC. However, the cost of Bitcoin's volatility far exceeds the cost of currency debasement if Russia starts accepting the Chinese yuan for oil (as they did). Just like for excluded countries, Russia and other vassals are far better off using a payment network they control. Because Bitcoin is permissionless for everyone, and that runs contrary to the interests of countries that want to influence their trade partners.

Furthermore, Bitcoin's monetary policy is fixed. In essence, a country like Russia would swap trading in dollars, which they can't influence, to Bitcoin, which they also can't influence and that is volatile.

Assumption: minor players will eventually FOMO.
The same false premise applies here — the Swiss National Bank and the Bank of Japan don't trade to make a profit. They could make unlimited profits if they wanted to through seigniorage. Even the article admitted that there is "no clear story" as to how it could happen.
Assumption: governments will print to acquire BTC.
Let's run with the assumption that BTC is the best collateral. Debatable but certainly not completely wrong. Governments swapping their "fiat tokens" to get BTC would still be an implausible scenario since it would undermine the fiat currency's legitimacy. Even if we reach the point when crypto has become so accepted that major central banks start acquiring it, this scenario would endorse crypto and cast doubt on fiat currencies. Such a future would be a classic case of probably nothing and could backfire badly for central banks.
Assumption: everyone wants to use the best collateral (BTC).
Maybe the biggest flaw of this game theory is that central banks actually want hard money. But there is no incentive for them to use hard money. In fact, the opposite is true. Central banks (and by extension the people they create value for, asset holders) profit from buying hard assets with soft fiat currencies. But it's much better to obfuscate your financial trail when doing so and not to put the hard assets straight on your balance sheet. The financial system is incredibly complex for a reason.
Assumption: an independent payment ledger is needed.
The problem with independent ledgers is that...they're independent. China is currently happily buying Russian oil at a fat 30% discount. Such deals are much easier to push through when a state controls the infrastructure and can dictate the T&C. Of course, a state would like to have the option to join a permissionless ledger. But it would also like to ban others from doing so. You can't have it both ways.
In fact, it seems far more likely that BRICS countries will develop and integrate their own payment networks before adopting Bitcoin.
Assumption: Bitcoin nation-state theory will reform the financial system.
The final flaw of this theory is that it's short-sighted. Do states want the Bitcoin network and its blockspace for settlements? Or BTC as an asset like gold? If it's the latter, what's the point if no one else holds the asset and you can never liquidate?

Imagine Do Kwon being China and telling El Salvador about their…size.

De-dollarization entails a lot more than just using the dollar to trade oil. It extends to alternative reserve currencies, corporate and sovereign bonds, equity pricing and also settling payments. BRICS countries are already pursuing such efforts, but it's harder than it looks and takes a lot longer than you think:

Put simply, they would be interested in reducing the dominance of the petrodollar. But not at the price of a petroyuan. Or a petrobitcoin. So it's an intricate balance that will take a long time to find an equilibrium.

Conclusion: Is This Theory Useless?

Not at all!

In fact, it does get some things right. For instance, the covert acquisition of BTC through state-sponsored mining, either through tax breaks or outright subsidies. Do as states do, not as they say.
Also, bottom-up adoption of BTC at a massive scale could change the variables. In that case, the Bitcoin network could become a serious threat to established payment networks, and states would be forced to react. However, we're still a long way from that and might never get there.

The game theory is interesting to observe, and you should keep an eye on what moves states are making. But don't expect any of them to ditch the dollar for satoshis any time soon.

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