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

The argument hinges on the premise that a universally accepted unit of account, representing a consistent share of total wealth, can naturally generate price signals that encourage macroeconomic stability. Bitcoin stands out due to its unique characteristics such as finite supply, inertness, fungibility, accessibility, and traceable ownership history, positioning it as a prime candidate for this role.

The post revisits the historical significance of the unit-of-account function in money, highlighting its foundational role in the enforcement of contracts and debts, as documented by David Graeber in "Debt: The First 5,000 Years." This relationship between money and state underscores the critical nature of contracts and debts across all economic systems, including those based on credit, which are integral to human economic activity and entrepreneurship. These insights challenge the dismissal of credit by some within the Bitcoin community as merely an artifact of fiat economies.

Central to the discussion is the concept of an optimal unit of account that equates to a constant, universally agreed-upon share of total wealth, thereby aligning with the entirety of economic utility. Traditional monetary policy, aimed at achieving price stability and maximum employment, is critiqued for potentially inducing macroeconomic instability through its inability to adeptly respond to economic overheating and contractions. In contrast, a unit of account based on relative wealth could inherently stabilize the economy by adjusting the difficulty of servicing debt in response to shifts in wealth relative to income, thereby mitigating speculative bubbles and economic downturns.

Bitcoin's proposition as a solution is explored through its potential to serve as this new unit of account, offering price stability concerning asset prices rather than goods and services. This shift could lead to a self-stabilizing economy where natural price signals adjust for supply and demand without necessitating deflationary concerns typically associated with traditional currency appreciation during crises.

The narrative further evaluates the implementation and transition towards Bitcoin's adoption as a generally agreed upon unit of account, acknowledging current benchmarks against Bitcoin by hedge funds, VC firms, and public companies, alongside financial media references. However, the widespread adoption in legal contracts remains limited, suggesting a gradual path towards consensus driven by voluntary coordination and legal recognition. This journey is marked by volatility and uncertainty, akin to historical monetary transitions but holds immense potential benefits for societal economic stability.

In conclusion, the game-theoretic approach to understanding Bitcoin's value and its role as money suggests an inevitable gravitation towards Bitcoin as a stable, generally agreed upon unit of relative wealth. This equilibrium, where Bitcoin represents half of total wealth, could dramatically reduce monetary-induced instabilities, presenting an opportunity too significant to overlook. The analysis posits that despite the challenges and time required for transition, the game-theoretic implications of selecting Bitcoin as this unit of account are compelling, promising a future of greater economic stability.