Generally the monetary cycle is that of good money driving bad money into hiding
I think you wanted to say that bad money drives good money into hiding.
This is a very good point, its called the Gresham Law, although Gresham did not discover it and actually promoted bad money.
I think this can be a problem for bitcoin, since people will tend to use bad money (dollars, euros, etc...) before spending bitcoins. On the other side since bitcoin is not backed by the guns of any government maybe it pushes in the other direction.