A Game-Theoretic Approach to Bitcoin’s Valuation in Equilibrium

This includes an anticipation of Bitcoin becoming a widely accepted currency, influenced by both historical economic laws and the unique properties it possesses. The analysis begins with a critique of applying traditional valuation methods, like Gresham's Law, to Bitcoin, arguing that the digital currency does not fit the mold of physical coins and thus requires a different framework for understanding its utility and value.

The core of the argument is built around the concept of perfect capital markets, suggesting that for such markets to function optimally, they require a unit of account that represents a constant fraction of the economy's total wealth. Bitcoin is positioned as the leading candidate for this role, given its characteristics such as finite supply, fungibility, and traceability. This argument is supported by the notion that a universally agreed-upon unit of account can facilitate macroeconomic stability by generating natural price signals that encourage balanced economic activity without the need for external intervention.

Furthermore, the discussion revisits the historical significance of the unit-of-account function in enforcing contracts and debts. It challenges the dismissal of credit systems within some Bitcoin circles, emphasizing the critical role of money and debt in all economic systems. The analysis critiques traditional monetary policy for its potential to induce macroeconomic instability, proposing instead that a unit of account based on relative wealth could inherently stabilize the economy by making debt servicing more manageable in response to shifts in wealth.

The transition towards Bitcoin's adoption as a universal unit of account is acknowledged as a gradual process marked by volatility and uncertainty. Despite the challenges, the narrative suggests significant potential benefits for societal economic stability. The game-theoretic approach to understanding Bitcoin's value proposes that its inevitable acceptance as a stable unit of relative wealth could dramatically reduce monetary-induced instabilities. This equilibrium, where Bitcoin represents half of all wealth, underscores the transformative impact it could have on future economic transactions and stability.