trey on Nostr: Contrary to conventional monetary theory, bitcoin may need to be adopted as a unit of ...
Contrary to conventional monetary theory, bitcoin may need to be adopted as a unit of account before it can fully function as a medium of exchange.
The key driver behind this shift is the opportunity cost of not holding bitcoin, which incentivizes individuals and businesses to seek payment in bitcoin and price goods in bitcoin terms. As this shift occurs, bitcoin’s circulation naturally increases, reinforcing its role as a true global currency. In this way, unit of account adoption acts as a catalyst rather than a final step, unlocking bitcoin’s potential as a widely used medium of exchange.
The conventional progression of monetary adoption follows a three-step sequence: store of value → medium of exchange → unit of account. However, in the case of bitcoin, this order may be reversed in key respects. Specifically, bitcoin’s adoption as a unit of account can act as a forcing function for its adoption as a medium of exchange, driven by the opportunity cost of not holding bitcoin in an environment of increasing monetary debasement.
Historically, new forms of money first emerge as a store of value, later transition into a medium of exchange, and only after widespread acceptance do they become a unit of account. This is because:
- A money must first be trusted to hold its value before it is widely accepted in trade.
- Only after mass adoption as a means of payment do people start thinking in terms of that currency, allowing it to function as a pricing standard.
Bitcoin has so far followed the first step—acting as a store of value—but has struggled to gain traction as a medium of exchange. The key reason for this is its high volatility and the strong incentives to hold rather than spend.
However, a shift in how bitcoin is perceived—toward viewing it as a unit of account—could serve as a necessary precursor for its medium-of-exchange adoption.
Economic actors (individuals, businesses, and institutions) make financial decisions based on opportunity cost—what they forgo by choosing one option over another. As bitcoin’s price appreciates over time relative to fiat currencies:
- Individuals and businesses increasingly recognize the cost of holding and transacting in depreciating fiat currencies.
- They begin to demand bitcoin as payment rather than accepting fiat, since bitcoin is expected to preserve and potentially increase in value.
- Workers, contractors, and service providers start asking for bitcoin-denominated payments to retain their purchasing power.
This shift in incentives begins to change how people think about money. Instead of measuring prices in fiat and converting to bitcoin, they start thinking directly in bitcoin terms—a hallmark of unit of account adoption.
Once a critical mass of people starts pricing and negotiating in bitcoin terms, medium-of-exchange adoption follows naturally:
- If businesses begin denominating goods and services in bitcoin, the need to convert back to fiat decreases.
- As more people receive wages, contracts, and invoices in bitcoin, it becomes easier to spend directly in bitcoin.
- Bitcoin transactions increase, improving liquidity, reducing volatility, and reinforcing its utility as a means of exchange.
In this sense, unit of account adoption serves as a forcing function:
- By thinking in bitcoin terms, individuals and businesses normalize Bitcoin transactions.
- This reduces friction in using bitcoin for daily transactions, accelerating its adoption as a medium of exchange.
Discuss 👇
The key driver behind this shift is the opportunity cost of not holding bitcoin, which incentivizes individuals and businesses to seek payment in bitcoin and price goods in bitcoin terms. As this shift occurs, bitcoin’s circulation naturally increases, reinforcing its role as a true global currency. In this way, unit of account adoption acts as a catalyst rather than a final step, unlocking bitcoin’s potential as a widely used medium of exchange.
The conventional progression of monetary adoption follows a three-step sequence: store of value → medium of exchange → unit of account. However, in the case of bitcoin, this order may be reversed in key respects. Specifically, bitcoin’s adoption as a unit of account can act as a forcing function for its adoption as a medium of exchange, driven by the opportunity cost of not holding bitcoin in an environment of increasing monetary debasement.
Historically, new forms of money first emerge as a store of value, later transition into a medium of exchange, and only after widespread acceptance do they become a unit of account. This is because:
- A money must first be trusted to hold its value before it is widely accepted in trade.
- Only after mass adoption as a means of payment do people start thinking in terms of that currency, allowing it to function as a pricing standard.
Bitcoin has so far followed the first step—acting as a store of value—but has struggled to gain traction as a medium of exchange. The key reason for this is its high volatility and the strong incentives to hold rather than spend.
However, a shift in how bitcoin is perceived—toward viewing it as a unit of account—could serve as a necessary precursor for its medium-of-exchange adoption.
Economic actors (individuals, businesses, and institutions) make financial decisions based on opportunity cost—what they forgo by choosing one option over another. As bitcoin’s price appreciates over time relative to fiat currencies:
- Individuals and businesses increasingly recognize the cost of holding and transacting in depreciating fiat currencies.
- They begin to demand bitcoin as payment rather than accepting fiat, since bitcoin is expected to preserve and potentially increase in value.
- Workers, contractors, and service providers start asking for bitcoin-denominated payments to retain their purchasing power.
This shift in incentives begins to change how people think about money. Instead of measuring prices in fiat and converting to bitcoin, they start thinking directly in bitcoin terms—a hallmark of unit of account adoption.
Once a critical mass of people starts pricing and negotiating in bitcoin terms, medium-of-exchange adoption follows naturally:
- If businesses begin denominating goods and services in bitcoin, the need to convert back to fiat decreases.
- As more people receive wages, contracts, and invoices in bitcoin, it becomes easier to spend directly in bitcoin.
- Bitcoin transactions increase, improving liquidity, reducing volatility, and reinforcing its utility as a means of exchange.
In this sense, unit of account adoption serves as a forcing function:
- By thinking in bitcoin terms, individuals and businesses normalize Bitcoin transactions.
- This reduces friction in using bitcoin for daily transactions, accelerating its adoption as a medium of exchange.
Discuss 👇