Bitcoin St Petersburg Game – Bitcoin Magazine: Bitcoin News, Articles, Charts, and Guides

If you’ve fallen down the Bitcoin rabbit hole even a foot, you’ve probably seen references to the idea of “everything there is, divided by 21 million.” Originally posited by Knut Svanholm, Ioni Appelberg and Guy Swann in a YouTube video with the same title, the concept reflects the seemingly infinite potential value of Bitcoin. As it continues to overtake various asset classes like gold and spread into new markets, the total value of the Bitcoin market appears to be only constrained by the absolute maximum of 21 million circulating bitcoin.

When a financial endeavor promises, in theory, to yield infinite (divided by 21 million) returns, it’s easy to get caught up in the hype. People have even taken out mortgages to buy bitcoin. In the face of infinitely high returns, this isn’t irrational. Why would you not pay anything and everything for the chance to make your life infinitely better? However, the St. Petersburg game, a thought experiment in economics that can trace its roots all the way back to 1713, may offer some insights into the hype surrounding the potential value of bitcoin.

The St. Petersburg game means a lot more than the Bitcoin Bowl in St. Petersburg, Florida. Originally published in Papers of the Imperial Academy of Sciences in Petersburg by Daniel Bernoulli, the St. Petersburg paradox is a thought experiment that pushes traditional behavioral economics to the test. Imagine that you’re asked to pay some amount of money to participate in a bet. In the bet, a fair coin is tossed until it shows heads. When it eventually shows heads, you get paid two dollars multiplied by the number of times it was tossed. If it lands on heads on the first toss, you get paid $2. If it lands on tails on the first toss and heads on the second toss, you get paid $4. If it lands on heads on the third toss, $8, and so on and so forth. How much should you be willing to pay to play this game?