Bitcoin Forum

Gresham's law implys that when given a choice between two currencies to spend, people will choose the less valuable one.
bitcoin, being the ultimate form of money suffers from this effect (much the same as gold).
if i can buy something using fiat or using bitcoin ill choose fiat, because fiat depreciates rapidly and bitcoin is valuable and rare.

if I'll pay with bitcoin I'll have to go through the hassle of converting fiat to bitcoin to compensate myself for the loss of bitcoin.

this could limit bitcoin's ability to function as a common currency and instead just serve as a store of value.

If I would be absolutely sure of the long term success of Bitcoin and that it is a superior Form of money,  I would try to have as much of my monetary wealth as possible in Bitcoin an as less as possible in fiat. Therefore I would have no other choice than to use Bitcoin when I need something.

Sadly this is currently still not the case.

Yet Another Economist Axiom. They remind me of the psychologist trends of the 1970's. Why should I care what some people consider currency? There is no common currency anymore. People use payment systems, but few people hold any useful amount of currency for anything other than bus fare, coffee, or lap dances.

currency does not have to be physical, indeed most currencies today are digital.

You are right bitcoin is moreover a asset and fiats are easy to use and aren't replaceable.If the assets would replace fiats why the gold didn't or the platinum ???

It does not suffer, just like gold never suffered for being a good money and lose its value. Bitcoin will be used mainly as a high powered money, as a store of value, it has international payment function, not like gold

Greshams law only applies when the two options have a different real value, but the same face value.

For example a copper-alloy dime vs a silver-alloy dime.

Obviously the silver dime is worth much more, but it's still only worth a dime on paper.

Therefore the silver ones would be hoarded (in their own country or other countries) or melted. And the copper ones would be spent.

Bitcoin is more valuable than any other currency but the face value is also the actual value. Which makes hoarding bitcoin quite pointless. Also if you spend bitcoin and have other currency left it makes sense to top up the bitcoin again.

This way you do not decrease the amount of bitcoin you hold, but you do support the bitcoin economy. Which makes your bitcoin worth more even though you have the same amount.

Gold is a different thing aktogether, gold is a great store of value, but a terrible payment method.

It's unsafe to carry large amounts of gold. Heck it's even not safe to carry one ounce of gold, as it's worth so much. Losing one ounce of gold is like losing an entire months wage for most of us. (After taxes). Maybe even worse. Many cannot afford to lose that. Also many stores do not directly accept gold for obvious reasons. (Exchange rate, change, measuring weight and purity, etc.)

Bitcoin is designed to be practical, gold is not.

Yeah, it will be gold but with the benefits of a worldwide digital currency, I dont think we'll see people paying buritos with BTC unless it gets an insane amount of adoption, almost defeating FIAT.

Gold became money because kings forced people to use it as money.  Unless we are forced to use bitcoin dont think itll be anything like gold

Bitcoin does not suffer from Gresham's law, it profits from it!

Assume Bitcoin is the best form of money, everybody will want to have it. Consequently people will liquidate other forms of money to buy Bitcoin. In turn fiat (as the worst form of money) will be devaluated beyond usability. Merchant will prefer accepting Bitcoin if not forced to accept fiat. Certain special goods might only be offered against Bitcoin. Fiat will loose purchasing power and credibility until it is replaced by Bitcoin only.

Of course, that's the ideal case... ;D

ya.ya.yo!

I agree, and this is part of the problem, it can't be a good store of value as long as it has such downside price risk.  So even though it is an awesome payment network being reluctant to spend it is understandable.  At the same time, the range of price movement, especially down, hurts the store of value purpose.

However, gold and silver have managed to overcome this and I expect bitcoin will too!

This is common myth, the usage of people came first, not authority.
King acted as a buyer of gold, which made it more precious, but he used that because people were using that.
The concept of "legal tender" is relatively new. (in france 1870)

Yes.  But I would say benefit from.  bitcoin would not exist if congress and the world were responsible.

long term m2 growth rate 6%.
long term bitcoin growth rate 0%.

Personally, if I have the option of paying with either LTC or BTC, I spend LTC.  Psychologically, it feels as though I'm parting with something less valuable an that is easier to recoup.  I'll also usually spend fiat before either BTC or LTC for the reasons.  So, I would say "yes" to answer the OP's question, but to what degree I don't know.  It seems that businesses like Overstock are seeing consistent purchases made with BTC.

Do you have citation for this? From the book Debt: The First 5000 Years.  The author Davud Graeber suggests that early economies were gift economies.  Then credit.  Then coinage

Gold and precious metal coins came from imperial expansion.  Rome taxed its citizens w gold coins.  They paid the armies w these gold coins so they can buy food and supplies during their campaigns

Gold was originally collected by the elites as ornament but wasnt used as money until coinage

You dont need to spend ONE BTC you know?  ::)

That is a good observation! In old egypt era, gold become valuable just because Pharaoh need them to decorate and show off their wealth, since they command large amount of wealth, they raise the gold price by bidding high. Average people couldn't even tell the difference between gold and alloy, they are just been told that gold is valuable by the gold merchants

Kings could force people to use gold as currency, just like today's government force people to use fiat money. But this monopol situation can be changed, especially in modern democratic countries. People should have the freedom to select the currency that they prefer, not forced by government to use fiat money, which is losing its value every year due to inflative monetary policy

The law appears to have an effect as most people I know are hoarding bitcoin and spending their fiat.

It may as well be good for bitcoin to serve as a store of value for now until workers and suppliers are willing to take bitcoin as wages and trade settlement.

I would disagree with your rational behind this. If you are given the choice between spending LTC and BTC you should pick the one that gives you the better rate. It is very easy to convert BTC to LTC (or LTC to BTC) on almost any exchange. If you can get a better deal paying in bitcoin then you should spend your bitcoin and if applicable sell your LTC to buy the BTC you just spent.

I think given a choice, people will spend the currency that gives them the best deal. If the price is the same across two currencies then they will spend what is easiest to acquire.

Adam Smith talks a little bit about the history of money in "Of the Origin and Use of Money" of The Wealth of Nation. He explains that coinage did not came from oblivion, and was not monopoly of the state.
Coinage was the response to a practical problem : Being paid by weighting gold nuggets -or gold ornament- was hard, the weight needed to be perfectly precise and any small difference or error could cost a lot to the buyer or seller, also there was no way to assert the fineness of gold.
This is where coins get used for the first time, and was not monopoly of the state, but from privately owned mint.

The payment by gold nugget, came itself by the intrinsic value of gold to make nice ornament with it. (In fact, the reason why some libertarian do not believe in bitcoin is because it lacks the intrinsic value -or use value in mises terminology-, that permitted gold to become a medium of exchange in the first place)
By today terminilogy, we can say that ornament was the killer app of Gold, this is what pushed Gold into the masses. And it is true, Bitcoin has no killer app for now. :p

I suggest to read that David Graeber book.  Hes an anthropologist.  Smith got it wrong and mainstream economics just followed Smith.  So Smith created the myth of how money came into being

When presented w anthropological evidence most economists accept Graeber version

http://www.nakedcapitalism.com/2011/09/david-graeber-on-the-invention-of-money-–-notes-on-sex-adventure-monomaniacal-sociopathy-and-the-true-function-of-economics.html

Not at all, if people can learn that you can just buy part of a BTC.

More valuable when compared to what? If you have a currency exchange then you could simply exchange one currency for another. If this was true then why are people not paying for things in pennies and one dollar bills instead of twenty dollar bills? A one dollar bill is 1/20 of the value of a 20 dollar bill and a penny is 1/100th the value of a dollar bill.

I read your link, but there is no relation about how gold became a medium of exchange that we talked about.


A "gift economy" as he calls it, is nothing but the invention of debt. You can call it a "favor", it does not change the meaning.
But as long as the concept of debt exists, it surprise me that your article does not talk about how actors of such economy could keep track of their debt without the need of money.
Money was created as a solution to the problem of keeping track of debt without any convenient writing system.

The only way to keep track of favor, without money, is ink and paper, both which was not yet invented.

Adam Smith advocated that money what invented because of coincidence of need problem of barter economy.
It does not contradict the fact that a "gift economy" after barter could be existing for a while, but I find it highly dubious because without money and convenient writing you can't possibly keep track of debt (or favor as he calls).
It is more believable that a socialist economy (where all actors share what they hunt) was existing in a tribe, than such gift economy.
Also they do not explain why, people have started to exchange ornament as money instead of continuing such a "gift economy", if it was not to solve the accountability problem.

Oh, trust me, I disagree with my rationale behind this, too!   I'm just explaining how I'm influenced by psychological factors, particularly when the difference in currency rates is negligible. 

The reason I mention this is because this may carry over to the difference in rates/fees between using cryptocurrencies and more traditional forms of payment like credit cards.  A lot of people will still likely use credit cards despite the possibility they may spend as much as 1-3% less by using cryptocurrencies (e.g. if merchant's provide a discount for crypto purchases).  Although irrational from a purely economic perspective, it's a valid point.  I'm evidence of it.

The link is David Graeber explaining why Adam Smith and mainstream modern economics was wrong w regard to invention of money.  There was no barter economy.  The anthropological record doesn't show it.  Barter was used only with strangers --  someone that you are not likely to ever see again

Its called a "gift economy" because there was no unit of account.  Sometimes you give someone a few goats and you expect their daughter as an exchange.

When I am looking for a credit card, I will always look for the best deal. If a credit card company can give me 3% cash back at grocery stores, and 1% cash back everywhere else, and another credit card can give me 2% cash back everywhere, guess which one I will use at the grocery story and guess which one I will use everywhere else. I don't need to give you an answer to know. It should be obvious.

When new egg was offering ~20% on purchases with bitcoin, guess how I paid or my new egg purchase that I accelerated by a few months? Again, it should be obvious. I still have the same amount of bitcoin that I did before my purchase, I simply bought more.

But many people don't think like that, or at least not all the time even if they know it's a financially smarter decision.

It's financially smarter to go to the gas station across the street because its 4 cents cheaper per gallon.  But, that left turn is really, really annoying.  Too annoying.

To me, time, and feeling in control, are very valuable to me.  If it costs me a dollar to decide that I don't want to cut through 4 lanes of traffic within 50 feet of an intersection to get to the left turn lane just to get gas that's a bit cheaper, so be it.  I think sometimes I even psychologically turn down better deals simply because I'm stubborn and I like to feel that I wasn't pushed or pressured into a decision.  Of course I don't think like this all the time in every situation, but depending on my mood or the day I'm having, it happens.

People are weird.  Psychology matters.

I think that is very interesting, may be bitcoin suffer from Gresham's law  ::)

Greshams law could apply between real bitcoins and debt bitcoins.

Say you had debt bitcoins circulating in the form of bills of exchange. When paying, you would get rid of the bills first, real bitcoins next.

In the gold market we don't have this schism yet, probably because the paper gold is easier to transact.

Edit: With bitcoins contra USD, the law does not apply, as it is a different unit and they are free floating.

In your example of people having to turn left to get gas that is $0.04 cheaper, you need to take the time this takes into consideration as well. If you are buying 15 gallons of gas then 4 cents is only 60 cents for the entire transaction. If you assume that it takes 3 minutes to turn left to get into the gas station and 3 minutes to turn left again to get out then this would only be worth it if your time is worth less then $6 per hour, which almost everyone's time is (as measured by hourly wages).

If you have two credit cards in your wallet, it does not take more then a few seconds to remember which credit card gives a better level of rewards depending on what store you are shopping at.

It is very hard to let go of Bitcoin due to its "lucrative" nature I guess.
It's so exciting to obtain but hard to let go of! For anything!

I would argue that Bitcoin isn't an example of Gresham's law at all. It is simply in the early stages of adoption and its utility hasn't been fully determined, so there's lots of speculation and price volatility.

It doesnt , we are just pioneers yet, give it more time.

It suffers from uninformed people and general illiteracy.

Well, I don't disagree with you.
Bitcoin is very far from success.
At the moment bying with fiat is way more comfortable, as yousaid.
But at time progresses, we will see that bitcoin gets easier and easier to use for the average person.
As for the Greshams law, you need to read about Deflationary spiral.
http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral
There are many arguments to counter the deflationary spiral theory.
Once the asset you hold becomes valuable, you will be motivated
to spend it. Holding will always be profitable, but if bitcoin gets to replace dollar and become
worldwide currency, people will be required to sacrifice their holdings to make daily trades for goods..