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

The argument begins by highlighting a paradox in Bitcoin's path to becoming a universally agreed-upon unit of account: the more inevitable its success seems, the more vulnerable it becomes to monopolization by powerful coalitions, thereby undermining its stability and viability. This vulnerability is rooted in the nature of power as a coordination game, suggesting that Bitcoin's widespread adoption could ironically lead to its downfall through aggressive consolidation efforts.

Further exploration into Bitcoin's valuation from an academic perspective reveals a contradiction in the application of traditional financial theories to digital currencies. Bitcoin, which stands as a prime candidate for fulfilling the role of a "Hayek" or an independent unit of account necessary under perfect capital market assumptions, challenges the consistency of academic scrutiny when compared to traditional assets like stocks and bonds. The notion that Bitcoin could maintain a constant fraction of total wealth aligns with the theoretical requirements of a perfect capital market, yet this potential is often dismissed or overlooked in scholarly discourse. This inconsistency calls for a reevaluation of how financial principles are applied across different asset classes, urging scholars to adopt a more uniform evaluative approach to ensure equitable assessment of both digital and traditional assets.

The discussion also delves into the intricacies of Gresham's law and its applicability to Bitcoin, emphasizing that the law, which states that bad money drives out good money in circulation, does not directly apply due to Bitcoin's non-physical nature and its operation outside conventional currency systems. This leads to a broader examination of Bitcoin's equilibrium dynamics and the challenges in applying traditional asset pricing theory to its valuation. The argument posits that under the assumption of perfect capital markets, Bitcoin's value primarily stems from its function as a unit of account rather than its more commonly cited features like limited supply or transaction finality.

Analyzing Bitcoin through the lens of economic laws and their implications on its future trajectory, the narrative anticipates a shift influenced by Thiers' law, where good money eventually drives out bad, suggesting that Bitcoin's initial phase of being hoarded will give way to broader utilization as a daily currency, especially during periods of hyperinflation. This transition underscores the complex interplay between economic principles and Bitcoin's integration into financial systems, highlighting a nuanced view of its evolution toward becoming a key component of global economic transactions.

Moreover, the game-theoretic rationale supporting Bitcoin's potential as the optimal unit of account suggests that a universally accepted unit representing a consistent share of total wealth could foster macroeconomic stability without external intervention. Bitcoin's unique attributes position it as an ideal candidate for this role, challenging traditional monetary policies by offering a self-stabilizing mechanism that adjusts economic activities in response to wealth and income shifts, potentially mitigating speculative bubbles and downturns.

In conclusion, the comprehensive analysis of Bitcoin's valuation, its theoretical underpinnings in economic and game theory, and the practical challenges it faces on the path to widespread adoption presents a compelling case for its role as a transformative economic force. Despite current limitations and volatility, the long-term game-theoretic implications of adopting Bitcoin as a universal unit of account offer a promising vision of enhanced economic stability and efficiency, marking a significant departure from traditional financial systems and policies.