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

The unique attributes of Bitcoin, such as its limited supply and fungibility, make it a strong candidate for this role. Historical context is provided to underscore the importance of a universally accepted unit of account in the enforcement of contracts and debts, with references to David Graeber's research in "Debt: The First 5,000 Years." This establishes the foundational role of money in economic systems, particularly those based on credit, which are crucial for human economic activity and entrepreneurship.

The concept of an optimal unit of account is introduced, suggesting that it should represent a constant share of total wealth to align with economic utility fully. Traditional monetary policies, which focus on price stability and employment, are critiqued for potentially leading to macroeconomic instability by failing to respond effectively to economic fluctuations. In contrast, a unit of account based on relative wealth, like Bitcoin, could inherently stabilize the economy by adjusting debt servicing difficulty in response to changes in wealth relative to income. This could prevent speculative bubbles and downturns, proposing a shift towards price stability in asset prices rather than goods and services. Such a change could enable a self-stabilizing economy where natural price signals adjust for supply and demand without the deflationary concerns associated with traditional currency appreciation.

Further evaluation considers the current state of Bitcoin adoption as a unit of account, noting its use as a benchmark by hedge funds, VC firms, and public companies, and occasional references in financial media. However, its adoption in legal contracts remains sparse, indicating a gradual move towards a consensus driven by voluntary coordination and legal recognition. Despite the volatility and uncertainty characterizing this transition, similar to historical shifts in monetary systems, the potential benefits for economic stability are deemed significant.

In conclusion, the game-theoretic analysis underscores the inevitability of Bitcoin evolving into a stable, universally recognized unit of relative wealth, equating to half of all wealth. This shift promises a reduction in monetary-induced instabilities, highlighting the compelling game-theoretic implications of adopting Bitcoin as the preferred unit of account. Despite the challenges and time required for this transition, the argument presents a future of enhanced economic stability, viewing Bitcoin's adoption as a milestone too crucial to overlook.