bad money drives out good

[bitcool]

Gresham's law states "Bad money drives out good money", if the purchasing power of bitcoin doubles every few months, who would spend it? (except it's something the buyer desperately need and can only be bought via bitcoin)

In this environment, sellers will need to work extra hard, provide high quality unique services to make the buyers open their wallets. I think this can be problematic for bitcoin economy's long term growth, the expansion of goods and service traded in bitcoin has not kept up with the pace of its appreciation and network growth.

[kiba]

In this environment, sellers will need to work extra hard, provide high quality unique services to make the buyers open their wallets. I think this can be problematic for bitcoin economy's long term growth, the expansion of goods and service traded in bitcoin has not kept up with the pace of its appreciation and network growth.

You know this, how?

We got lot of new people who just came in from the slashdot and security show traffic event. That mean we're going to see a lot more goods and services soon.

[Nefario]

This is a good question, bitcoin has all the properties of good money, and according to greshams law, bad money drives out good. So whats the bad money?

[Steve]

You are absolutely right about Gresham's law being a factor...but your conclusions about the detrimental effect on btc couldn't be more wrong.  Gresham's law works in bitcoin's favor, not against.  Yes, people will hoard btc and be reluctant to part with it, but that is a good...no, that is a *great* thing.  People will not have to work any more or less hard due to the value of btc.  They will still need to work hard against their competition...but the value of btc is irrelevant in that.  People will offer substantial discounts for payment in btc if they know btc is likely to appreciate in value.  And people will offer their goods and services in either btc, or dollars, or other currencies so long as they know there is a liquid and relatively hassle free exchange market.  They will start to value things in terms of btc if they can count on its value rising.  Would you say that gresham's law is negatively impacting the gold and silver markets today?  

What is critical is that it's very, very easy to exchange btc for currencies that are broadly accepted around the world.  If had had to pick an aspect of bitcoin to put more energy into, it's the exchanges.  It needs to be easier and cheaper for people to convert in and out of btc.  In fact, if you hold a lot of btc, you are an investor in the btc community and I would advise doing everything you can to make it easy for people to exchange various currencies for btc.  Exchange code should be open sourced, there should be lots of them, and people should offer the ability to exchange at minimal cost (it shouldn't be viewed as a profit maker...if you operate an exchange, your profit will come when btc goes viral and millions around the world use it...and exchanges will be the key enabled for that to happen).  My plan is to establish myself in the OTC and other exchanges and then offer my services (for free) to people in my local community that are curious about btc and have a decent understanding of money and investing.  I can take some of the pain in acquiring btc away for them.  Of course I also intend to accumulate btc.

The biggest risk I see in bitcoin is institutional.  The governments and financial institutions around the world are not going to like this one bit.  People in the btc community need think very carefully about this.  Btc will be labelled a ponzi scheme in the mass media.  Criminals will eventually find out about btc and use it for money laundering and other criminal activity.  One of the biggest tools that law enforcement has is the use of the financial system to track the activities of criminals.  The bitcoin proposition effectively takes that tool away from law enforcement.  It has to be socialized among the general population that part of the cost of freedom is that it makes some things, like law enforcement, more difficult.  But, at least for me, that is an acceptable cost to keep instruments like the financial system out of the hands of tyrants.  It also makes it more difficult for a government to finance itself...you are basically taking the printing press away from the government...you know force the government to be honest with respect to the wealth it must extract from the people.  They won't like that.

Bitcoin needs to spread, and it need to spread fast, and internationally...before these institutions are able to squelch it.

[just a man]

I'm down with everything you just said, especially about the exchanges.

[ptd]

There is a condition for gresham's law, the value of the currency must be set by political fiat. Banknotes are worth very little, but we accept them as valueable due to political fiat.

Consider, for example, that you have two £20 notes. One signed by someone famous and one is just normal. Then you walk into a shop and hand the shopkeeper the unsigned note, because it is worth more to you and the shopkeeper is obliged to accept both for £20. Bad money (of less value) has driven out good money (of more value). The same reasoning applies to clipped and unclipped coins, etc.

The value of bitcoins are not set by political fiat, so this reasoning does not apply.

[Raulo]

Gresham's law is probably one of the most misunderstood things in economics. Bad money drives out good when they are both identical in face value but different in intrinsic value. You have two coins, both with $1 face value, one made with silver, the other  with copper, when you get a silver coin you keep it but when you pay, you pay with copper. This way silver coins get stored and copper remain in circulation. But it only works because law recognizes both as identical, even though they are different. If this is not the case, Gresham's law does not apply. In countries with hyperinflation, people start to use anything else than the rapidly losing money and it's the opposite: exchanges are made with good money, bad money is only used when dealing with the government.

I cannot see any similarity in bitcoin. Bitcoin is different from, say, dollar and is not recognized as identical.

[Nefario]

That settles that then.

[bitcool]

You know this, how?

I don't have any hard number, it's just my personal observation/feeling.

I've felt the impact of btc appreciation (rising $ value of mybitcoin account) and network growth (declining coin income from btc mining), but I have yet found a service I am interested enough to buy from the trade section.

[kiba]

I don't have any hard number, it's just my personal observation/feeling.

I've felt the impact of btc appreciation (rising $ value of mybitcoin account) and network growth (declining coin income from btc mining), but I have yet found a service I am interested enough to buy from the trade section.

Maybe I could program/draw/write something for you. 

[amwt]

I have always been told that a steady inflationary economy (steady decrease in purchasing power of local currency) is healthy because people do spend money, and a high velocity of money is a good thing.

Simplistically in a real world economy with a strengthening currency, domestic spending is relatively unaffected but people enjoy better quality of life as imports appear cheaper. Export though suffers.

In the Bitcoin economy it's has a strengthening currency but it's 100% import (purchase of goods/services valued solely in "foreign" currencies). Worse still, every citizen of this Bitcoin economy really still thinks in terms of those "foreign" currencies. Why spend today when one can get more tomorrow? People stop spending and velocity of money slows to a halt, which obviously is unhealthy.

Whilst the community is still driven by enthusiasts, we should make a point (perhaps economically irrational) to generate/use/convert BTC, and not hoard it. Or, at least set aside a tiny portion for "savings" purposes.

[Steve]

I have always been told that a steady inflationary economy (steady decrease in purchasing power of local currency) is healthy because people do spend money, and a high velocity of money is a good thing.

Simplistically in a real world economy with a strengthening currency, domestic spending is relatively unaffected but people enjoy better quality of life as imports appear cheaper. Export though suffers.

In the Bitcoin economy it's has a strengthening currency but it's 100% import (purchase of goods/services valued solely in "foreign" currencies). Worse still, every citizen of this Bitcoin economy really still thinks in terms of those "foreign" currencies. Why spend today when one can get more tomorrow? People stop spending and velocity of money slows to a halt, which obviously is unhealthy.

Whilst the community is still driven by enthusiasts, we should make a point (perhaps economically irrational) to generate/use/convert BTC, and not hoard it. Or, at least set aside a tiny portion for "savings" purposes.

I don't think a low velocity is "obviously unhealthy" ...it might be, but I'm not certain.  Also, the notion that a steady inflationary economy is healthy because it induces people to spend is Keynesian BS IMO.  On the surface it seems intuitive...better to have people spend or invest money than to hoard it.  However, if you realize that hoarding is benefitting those that hold whatever is being hoarded with greater purchasing power, then what you are in effect doing is making a rational economic decision between investing in the community as a whole (hoarding) vs investing in some specific endeavor or consuming some good or service.  So, it's not obvious to me that steady inflation or hoarding are either good or bad.

[kiba]

I discount my price greatly for the hope of getting work. That mean labor, goods and services, are cheap. That benefit the spender.

[amwt]

Whilst the community is still driven by enthusiasts, we should make a point (perhaps economically irrational) to generate/use/convert BTC, and not hoard it. Or, at least set aside a tiny portion for "savings" purposes.

then what you are in effect doing is making a rational economic decision between investing in the community as a whole (hoarding) vs investing in some specific endeavor or consuming some good or service.

I think we are in an extremely primitive stage of a currency/economy and until it comes "real" we might consider making an effort in taking less than rational economic decisions if it benefits moving the economy forward. We are probably in the early seashell stage currency development, and the seashells are not so widely useful either. I doubt seashell spenders thought much between one economic action over another. They were just glad that they found an instrument that beats bartering slightly.

Like many on this forum, I have to confess that I'm not a economist and these are merely my hopefully commonsense thoughts, rightly or wrongly.

[ribuck]

... we might consider making an effort in taking less than rational economic decisions if it benefits moving the economy forward

But if we want the economy to move forward, then these "less than rational" economic decisions are actually rational after all.

[barbarousrelic]

Yeah, Gresham's Law only applies under legal tender laws.

[marcus_of_augustus]

The big banks and the govts they own, i.e. all of them, are not going to like this one bit, as the man said. But at present I do not think they can see it coming .... an open source, global clearing system alternate to the current bankrupt one running on cypherpunk video cards who would have thought ... but then neither did they see wikileaks, facebook, tor, skype or the internet itself in current incarnation.

When they see it for real, the might of the NSA, big bank big iron and whatever else machine power and bad press they can curry will be bought against it, hedge your bets accordingly (precious metals). It is going to be wild ride and an epic battle. Would like to see a few more full rack cabinets coming on-line before saying yes this can happen and going all in .... there will be others out there like us.

[just a man]

Not necessarily...

[Anonymous]

The big banks and the govts they own, i.e. all of them, are not going to like this one bit, as the man said. But at present I do not think they can see it coming .... an open source, global clearing system alternate to the current bankrupt one running on cypherpunk video cards who would have thought ... but then neither did they see wikileaks, facebook, tor, skype or the internet itself in current incarnation.

When they see it for real, the might of the NSA, big bank big iron and whatever else machine power and bad press they can curry will be bought against it, hedge your bets accordingly (precious metals). It is going to be wild ride and an epic battle. Would like to see a few more full rack cabinets coming on-line before saying yes this can happen and going all in .... there will be others out there like us.

How do you know something like this isnt already happening ?

 If its a defensive thing it might be kept quiet and underground. 

[marcus_of_augustus]

How do you know something like this isnt already happening ?

 If its a defensive thing it might be kept quiet and underground.

Ah, you'll know when it happens, imho. A black swan event like bitcoin taking over a significant portion of electronic transactions is going to cause untold chaos on currency markets alone, not to mention follow on ructions in any connected markets. The whole payments/monetary system and the western central banking model collapsed in 2007 anyways and was only propped up by tax-payer promises but that is now inevitably dragging govts. into bankruptcy. Markets will sense this coming first and start twitching before the spasms increase ... when that starts happening they'll attack.

I love that boiling bankster frog graphic ... give the frog a Bernanke face and replace the fire with glowering bitcoins as coals.

[grondilu]

How do you know something like this isnt already happening ?

 If its a defensive thing it might be kept quiet and underground.

Ah, you'll know when it happens, imho. A black swan event like bitcoin taking over a significant portion of electronic transactions is going to cause untold chaos on currency markets alone, not to mention follow on ructions in any connected markets. The whole payments/monetary system and the western central banking model collapsed in 2007 anyways and was only propped up by tax-payer promises but that is now inevitably dragging govts. into bankruptcy. Markets will sense this coming first and start twitching before the spasms increase ... when that starts happening they'll attack.

I love that boiling bankster frog graphic ... give the frog a Bernanke face and replace the fire with glowering bitcoins as coals.

I like this idea of bitcoin being a monetary black swan.  I think it could make a nice symbol for bitcoin.  Anyone would like to design a corresponding logo?

[Anonymous]

How do you know something like this isnt already happening ?

 If its a defensive thing it might be kept quiet and underground.

Ah, you'll know when it happens, imho. A black swan event like bitcoin taking over a significant portion of electronic transactions is going to cause untold chaos on currency markets alone, not to mention follow on ructions in any connected markets. The whole payments/monetary system and the western central banking model collapsed in 2007 anyways and was only propped up by tax-payer promises but that is now inevitably dragging govts. into bankruptcy. Markets will sense this coming first and start twitching before the spasms increase ... when that starts happening they'll attack.

I love that boiling bankster frog graphic ... give the frog a Bernanke face and replace the fire with glowering bitcoins as coals.

I meant the racks of computing power coming online. By the time the banksters do it their computing power will be innefectual compared to the existing bitcoin clusters. The bitcoin network itself is already amongst the largest clusters on earth.

I think during the last difficulty increase someone even used idle time on a supercomputer.

[bitcool]

I like this idea of bitcoin being a monetary black swan.  I think it could make a nice symbol for bitcoin.  Anyone would like to design a corresponding logo?

Or, it can be a phoenix, you know, rising from the ashes.

[Geremia]

Here's a good description of Gresham's law:

Gresham's Law comes into play, when several types of money have a conversion ratio specified by legal tender laws, different from their market price.

For example, let's say the law sets the ratio at 20 ounces of silver for one ounce of gold; but the market price is 15. Any contract or debt in silver can be now paid in gold. So instead of expending 20 silver, the debtor will buy an ounce of gold for 15. As a result, no one will be willing to enter a contract quoted in silver.

The undervalued money will vanish from the market, bringing down prices quoted in it. Those still using it will likely find themselves in trouble, because they made debts and investments under the old price level and expected their incomes to be correspondingly higher. The 'good money' will be held by the users of money, or sold into other countries, where the local laws do not apply. This exchange of currencies takes time, while the supply of money shrinks. [But this can't happen with BTC] This produces a temporary deflationary effect.

The Law is a special case of the usual effects of price controls by government: in this case, the government’s artificial fixing of an exchange rate between two or more moneys creates a shortage of the artificially under-valued money and a surplus of the over-valued money.

Couldn't the Fed artificially fix "an exchange rate between" USD and BTC such that USD would be "the over-valued money" and BTC "the artificially under-valued money"?

[Spendulus]

The most likely result would not be a directed and focused assault against bitcoin, but controls against currency flight.  Limits on how much you can move out of your country.  In that bill someone is one sentence that makes the law apply to bitcoin, even though a movement into bitcoin is not a movement geographically.

And that might be done by Executive Order.

Gresham's Law, bad money drives out good, is always followed by a second phase in which good money drives out bad.

[barbarousrelic]

Couldn't the Fed artificially fix "an exchange rate between" USD and BTC such that USD would be "the over-valued money" and BTC "the artificially under-valued money"?

If they tried continually buying Bitcoin at above market value, the price of Bitcoin would skyrocket, and the Fed would have to keep spending exponentially more money to get a greater fraction of the Bitcoin supply.

If they tried buying Bitcoin at less than market value, nobody would sell to them.

[Spendulus]

....Couldn't the Fed artificially fix "an exchange rate between" USD and BTC such that USD would be "the over-valued money" and BTC "the artificially under-valued money"?

Sure.  Many governments have tried such things, and a black market develops to compensate for the differences in values.  Those are already in place all over the world.  But yes, the stupid things that governments did yesterday are to be repeated tomorrow.

The problem is this.  Suppose that a government placed restrictions on Bitcoin.  Then in that country, someone....a police officer, a judge, a politician....wants to buy a $6 replacement battery for his cell phone.  He looks on Ebay (etc) and finds the cheapest, easiest way to buy it is from Hong Kong with Bitcoin.  A couple clicks later it's done.

Aggregate those individual purchasing decisions by millions or billions and you have the behavior of nations.  Some laws are simply disregarded.