What is a Zero-Sum Game? The Truth about Crypto Trading

Summary

Understanding the concept of zero-sum games is crucial for anyone involved in cryptocurrency trading and investment. In a zero-sum game scenario, the gains of one party or group are exactly balanced by the losses of another, creating no net gain or loss in the system. This mathematical equilibrium has significant implications for how we understand market dynamics.

Technically speaking, the stock and crypto markets are not zero-sum games in their traditional spot trading forms. The exception lies in futures and contract trading, where one party's victory directly corresponds to another party's loss. Stock and crypto trading diverge from the zero-sum model because the majority of speculators can hold their stocks or cryptocurrencies and experience growth over time without suffering total loss. This fundamental distinction shapes our understanding of market participation and risk management.

Understanding the Zero-Sum Game Concept

The term "zero-sum game" originates from game theory and has profound applications in financial markets. In the iconic 1987 trading movie "Wall Street", the protagonist asked Mr. Gekko, the infamous trader, "How much is enough? How many yachts can you water ski behind"? He replied, "It's not a question of enough, pal. It's a zero-sum game. Somebody wins, somebody loses. Money itself is not made or lost–it's simply transferred from one person to another".

This cinematic dialogue encapsulates a common misconception about crypto and speculative markets at large. Many critics who are skeptical of the industry claim that it's a zero-sum game, suggesting that all gains come at someone else's expense. Are Bitcoin and altcoin trading actually zero-sum games where people win at the expense of others? The short answer is no, but there are important exceptions that every trader should understand.

Think of zero-sum games as a competition where the victory of one person is the equivalent of a loss of another person. Some philosophers claim that life itself is a zero-sum game, because no matter how much we gain in our lifetime we will all eventually die, which means we will lose everything. However, this philosophical perspective doesn't necessarily apply to financial markets in the same way.

Below we'll delve into the specifics of zero-sum games and explain when crypto trading actually operates as a zero-sum game and when it doesn't.

What Is a Zero-Sum Game?

A zero-sum game is one in which a participant wins at the expense of another, with the total gains and losses summing to zero. To better understand this concept, consider poker as a classic zero-sum game example. When someone wins a poker game, they take the money from other participants at the table. In poker games, players are rarely playing against the house, and it wouldn't make a difference if they weren't. As such, the sum of the amounts won by some players equals the combined losses of the others; this is why it is a zero-sum game.

The mathematical precision of zero-sum games means that for every dollar gained, a dollar must be lost elsewhere in the system. This creates a closed ecosystem where wealth is redistributed but not created. Understanding this principle is essential for evaluating whether cryptocurrency markets operate under similar constraints.

It's important to note that the term "zero-sum" cannot be used to describe situations in which there is no winner. If there is no clear victor and everyone ends up losing, this is not a zero-sum game, this is a lose-lose game. This distinction matters because it affects how we analyze market outcomes and investment strategies.

Zero-Sum Game vs Win-Win Game

The opposite of a zero-sum game is a "win-win" or "lose-lose" game, and understanding this distinction is crucial for crypto investors. If two parties engage in a trade and one sells an asset to another, they can both be satisfied because neither necessarily results in a loss: Person A sells an asset and cashes out, achieving their goal of liquidity, while person B purchases an asset they believe will give them higher returns in the future, achieving their goal of potential appreciation.

This win-win scenario is fundamental to how healthy markets operate. People that are bullish on crypto trading tend to believe that it's a win-win game, where value creation and appreciation benefit multiple participants simultaneously. The growth of the overall market cap in cryptocurrency demonstrates how new value can be created rather than simply redistributed.

Based on this meaning of zero-sum games, we can analyze the state of the stock and crypto markets to determine if they bait speculators into a zero-sum game or offer genuine opportunities for mutual benefit.

Is Investing a Zero-Sum Game?

Investing is not a zero-sum game, and this principle applies to both traditional and cryptocurrency markets. While it is true that institutional investors or centralized exchanges in crypto control the vast majority of the liquidity and the assets, retail investors can make a profit without experiencing a total loss. This is a fundamental characteristic that distinguishes investing from pure gambling.

People who are skeptical of the stock market or the crypto market tend to believe that only people at the top who pull the strings can make a profit, and for the rest of us (the retail investors) trading is a zero-sum game because we lose everything and they win everything. However, this could not be further from the truth. Market growth and value appreciation can benefit participants across all levels.

Example of How Investing Creates Win-Win Scenarios

When people create a company, they sell their stock because they need money for something else. For example, the founders want to buy more equipment for a factory or expand their operations. Investors give the founder the money they need in exchange for their stock, and they get the money they need to grow the company which in turn makes the stock appreciate. This is a win-win game, and this is how healthy markets function.

Here's how to simplify it: Every time someone is selling, another person is buying. No matter how far down the price of an asset is crashing, there will always be people buying at what they perceive as attractive valuations. Conversely, whenever an asset is at its peak and making all-time highs, there are people selling despite the fact that it's going up at the moment, taking profits or rebalancing their portfolios.

Crucially, the seller or the buyer does NOT end up losing everything in either situation. This means that trading itself is not a zero-sum game in spot markets. Both parties can benefit from their decisions based on their individual time horizons and risk tolerances.

Note: There are certain exceptions for futures and contract trading, which we will explore in detail below.

Is Crypto a Zero-Sum Game?

Crypto is a lot more volatile than stocks and everyone who's been in crypto for more than a few months has witnessed at least one cryptocurrency go down 99% or more. We've all heard stories about Bitcoin crashes and how people lost their life savings in crypto or became millionaires overnight. This extreme volatility begs the question: "Is Crypto a zero-sum game"? As there are different answers based on the trading style and instruments used, we will answer them comprehensively here.

Is Bitcoin a Zero-Sum Game?

Bitcoin bought on the spot markets is not a zero-sum game, and this is an important distinction for investors to understand. If a trader buys Bitcoin at the spot price, they own the Bitcoin outright and they can sell it back later at their discretion. Even if they don't make a profit, they can sell at a loss and recoup part of their initial investment later on. This flexibility distinguishes spot trading from true zero-sum scenarios.

Bitcoin has gone up millions of percentage points over the past decade and virtually everyone who bought at market peaks were in the red for a while, but many eventually recouped everything and more. For example, people who bought the $20,000 top during the 2017 peak were at a loss for three years and later made a 3.5x return when Bitcoin made a new all-time high at $69,000 in subsequent years.

People who sell Bitcoin do not cause a total loss for people buying it, which means it can't be a zero-sum game by definition. It is a win-win scenario because both parties willingly engage in the trade and the person selling does not necessarily end up in a better position than the person buying or vice versa. If Bitcoin is crashing and people are panic selling, the people who sold first might avoid losses, but the people who buy the bottom and wait for the recovery often win more than the people who sold the bottom. This is where skills, market timing, and risk tolerance levels come into play.

Is Futures Trading a Zero-Sum Game?

Futures trading is a zero-sum game because futures contracts have an expiration date, creating a definitive settlement point. Crypto traders who buy futures are taking on leverage from the exchange to increase the amount of money they're trading with, while simultaneously increasing their risk exposure. On an exchange such as a major crypto exchange, a person trading futures would not buy Bitcoin itself but they would buy contracts that are priced differently. Those contracts obtain value from the spot price of Bitcoin.

The trader agrees to submit collateral if their position on the trade is wrong and the exchange agrees to pay a sum that is higher compared to their initial investment if their position is profitable. At expiration, one party must win and another must lose, creating the zero-sum dynamic.

There are exceptions to the zero-sum rule here. While the answer to the question whether futures and options trading is a zero-sum game is yes due to the expiration date, there are ways traders can avoid losing everything. For example, if a trader sets a stop loss, the system would cash them out at a certain point and they wouldn't lose all their assets, so it is technically not a pure zero-sum game. Risk management tools allow traders to limit their downside exposure.

Are Leveraged Tokens a Zero-Sum Game?

Leveraged tokens are a relatively new development in the crypto world and they allow traders to purchase tokens with 3x, 5x, or higher leverage in both directions: long or short. If a person invests $100 in a leveraged token with 3x leverage, it is similar to trading futures contracts with 3x leverage. For every 10% the crypto goes up, their position goes up 30%. Likewise, for every 10% loss their crypto experiences, their position goes down 30%.

This means leveraged tokens are not a zero-sum game because they operate on a win-win principle and they don't have an expiration date. Leveraged tokens are similar to spot trading in this respect, offering ongoing exposure without forced settlement. The only downside is that they increase the risk exposure for traders significantly and they are not advised to hold onto them for more than a day due to decay effects and rebalancing mechanisms.

When Is Crypto Actually a Zero-Sum Game?

Outside the conventional futures and options trading whereby the trade has to be settled at a certain date and either the exchange or the trader wins, crypto can become a zero-sum game when there is a "rugpull" or a massive downturn in the market that results in total loss for participants.

Examples of Zero-Sum Scenarios in Crypto

For example, there are over 300,000 ERC-20 tokens on Ethereum alone. Among the tens of thousands of tokens, some were created with the intention of scamming people by baiting them into purchasing a coin and then draining the liquidity for that coin on a decentralized exchange (DEX). In this case, the developer of the coin wins at the expense of speculators and it is a total loss for them. This represents a true zero-sum game where one party's gain is exactly another's loss.

Crypto can also become a zero-sum game while a coin is crashing to zero and the only people winning are people who sold high. For example, during the Terra (LUNA) crash when the crypto went down from $100 to sub-cents, the only people who won during the crash were the people who sold high while people who did not sell were left at a total loss. In situations like this, crypto operates as a zero-sum game where early sellers profit at the expense of holders.

Conclusion

Crypto trading can be a zero-sum game depending on the type of trading one engages in and the specific market conditions. As derivatives trading is considered a zero-sum game and nearly 50% of volume on crypto exchanges consists of derivatives trading, a significant portion of crypto trading could be classified as zero-sum. However, if investors don't take on leverage and pick quality projects to invest in for the long term, it operates as a win-win scenario where neither party results in a total loss.

The crypto market is taking active steps to reduce the impact of zero-sum scenarios on users. Most exchanges offer comprehensive manuals on setting "stop losses" that can help traders cash out early without losing everything. This prevents them from the total loss scenario of poker or any other pure zero-sum game. These risk management tools are essential for protecting capital in volatile markets.

Crypto is more volatile than stock markets and traditional commodities markets which is why traders are advised to trade with caution and proper risk management. If traders are using decentralized exchanges to trade new tokens, they face an increased risk of losing everything compared to investing in proven cryptocurrencies such as Bitcoin and Ethereum. The bottom line is that crypto trading is not inherently a zero-sum game, but there are important nuances in the trading styles and risks we're taking on in every scenario that determine whether we're participating in a zero-sum dynamic or a value-creation environment.

FAQ

What is a Zero-Sum Game? What does zero-sum game mean in cryptocurrency trading?

A zero-sum game means one trader's gain equals another's loss. In crypto trading, when you profit from a trade, someone else loses that equivalent amount. Total trading volume remains constant—wealth transfers between participants rather than being created.

Why is crypto trading considered a zero-sum game? Is one person's gain another's loss?

Not entirely. While short-term trading can be zero-sum, crypto markets create value through adoption and innovation. Price appreciation benefits all holders. However, in leveraged trading and derivatives, gains and losses do directly offset each other between participants.

In a zero-sum game trading market, how can ordinary investors profit?

Ordinary investors can profit by mastering technical analysis, managing risk through position sizing, timing entries during market dips, and developing disciplined trading strategies. Success requires continuous learning, emotional control, and adapting to market conditions rather than following the crowd.

Is cryptocurrency trading compared to the stock market both zero-sum games? What are the differences?

No, both aren't purely zero-sum. Crypto markets create value through innovation and adoption, while stocks generate returns via company earnings. However, individual trading can be zero-sum when profits come directly from other traders' losses, unlike stocks where value appreciation benefits all holders.

Understanding zero-sum games helps you recognize that in crypto trading, every gain requires someone else's loss. This awareness encourages disciplined risk management, realistic profit targets, and prevents overconfidence. You'll trade more strategically by accepting market realities rather than chasing unrealistic returns.

Understanding zero-sum games helps you recognize that in crypto trading, every gain requires someone else's loss. This awareness encourages disciplined risk management, realistic profit targets, and prevents overconfidence. You'll trade more strategically by accepting market realities rather than chasing unrealistic returns.

If crypto trading is a zero-sum game, how do exchanges and market makers profit from it?

Exchanges and market makers profit through transaction fees, spreads, and liquidity provision rather than from price movements. They earn commissions on every trade regardless of winner or loser, making consistent revenue from trading volume without directly competing in the zero-sum outcome.