Gresham's Law and Bitcoin

[joker_josue]

I recently heard about "Gresham's Law" in a conversation about Bitcoin.

Basically Gresham's Law says that: "Bad currency tends to drive good currency out of the market."

The law states that any circulating currency consisting of both "good" and "bad" money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the "bad" money. This is because people spending money will hand over the "bad" coins rather than the "good" ones, keeping the "good" ones for themselves. Legal tender laws act as a form of price control. In such a case, the intrinsically less valuable money is preferred in exchange, because people prefer to save the intrinsically more valuable money.

This situation sometimes occurred when the money in circulation was made of valuable metals (gold, silver and bronze). People preferred to spend coins with a lower metal value, to save those with a higher metal value. With inflation, coins with a higher metal value began to have a nominal value lower than the value of the metal they were made with, causing people to start melting these coins to obtain the metal. Thus, bad coins ended up dominating the market, and good coins disappeared.


Could something like this happen to Bitcoin?
In other words, are people starting to want to save their BTC coins so much that their value is lost?

[stadus]

Could something like this happen to Bitcoin?
In other words, are people starting to want to save their BTC coins so much that their value is lost?

This could happen to Bitcoin, and I believe we need to distinguish between bad money and good money.

For me, Bitcoin is the good money, while fiat is the bad money. Why? As stated in "Gresham's Law," bad currency tends to drive good currency out of the market. When we refer to the market, it could mean investment, which means Bitcoin gets pushed out so people can use it primarily as a store of value, while fiat is used for daily transactions.

However, this doesn’t mean Bitcoin will become obsolete or lose its value. Just like gold, it’s not used for daily transactions, but its value appreciates over time.

[Free Market Capitalist]

With inflation, coins with a higher metal value began to have a nominal value lower than the value of the metal they were made with, causing people to start melting these coins to obtain the metal. Thus, bad coins ended up dominating the market, and good coins disappeared.

It seems to me that you have not understood it well. Where did you get that from?

Could something like this happen to Bitcoin?

I myself have cited this law to defend that I do not believe that bitcoin will become a widespread means of payment, technical problems aside, because if you have a thousand ways to pay with fiat, which is inflationary, and shitcoins, that tend to go to 0, what sense does it make to pay with bitcoin?

In other words, are people starting to want to save their BTC coins so much that their value is lost?

Same as before, I think it's something you've misunderstood.

[joker_josue]

With inflation, coins with a higher metal value began to have a nominal value lower than the value of the metal they were made with, causing people to start melting these coins to obtain the metal. Thus, bad coins ended up dominating the market, and good coins disappeared.

It seems to me that you have not understood it well. Where did you get that from?

It's a simple reasoning. If a coin is made of silver, it is easily worth 1$, but the amount of silver that this coin has is worth 2$. It's worth melting down that coin and selling the silver, rather than using the coin to buy something for 1$.

But, it explains the theory of Gresham's Law better.

[AsiaHODL]

I recently heard about "Gresham's Law" in a conversation about Bitcoin.

Basically Gresham's Law says that: "Bad currency tends to drive good currency out of the market."

The law states that any circulating currency consisting of both "good" and "bad" money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the "bad" money. This is because people spending money will hand over the "bad" coins rather than the "good" ones, keeping the "good" ones for themselves. Legal tender laws act as a form of price control. In such a case, the intrinsically less valuable money is preferred in exchange, because people prefer to save the intrinsically more valuable money.

This situation sometimes occurred when the money in circulation was made of valuable metals (gold, silver and bronze). People preferred to spend coins with a lower metal value, to save those with a higher metal value. With inflation, coins with a higher metal value began to have a nominal value lower than the value of the metal they were made with, causing people to start melting these coins to obtain the metal. Thus, bad coins ended up dominating the market, and good coins disappeared.


Could something like this happen to Bitcoin?
In other words, are people starting to want to save their BTC coins so much that their value is lost?

Yes of course this is the case. Which is why right now, few will "spend" BTC, other than exchanging it for fiat to spend if really needed.

[Ambatman]

Yes it applies to Bitcoin,
Many consider Bitcoin the Good money so would prefer to hoard it rather than spending
While Fiat is becoming more of as a means of exchange than a store of value.

Could something like this happen to Bitcoin?
In other words, are people starting to want to save their BTC coins so much that their value is lost?

No instead the value increases
When bad money drives good money, it doesn't inherently reduce it's intrinsic value just the circulation.
This may even make it scarcer and the value would remain same or increase based on the market perception.

It's a simple reasoning. If a coin is made of silver, it is easily worth 1$, but the amount of silver that this coin has is worth 2$. It's worth melting down that coin and selling the silver, rather than using the coin to buy something for 1$.

But, it explains the theory of Gresham's Law better.

That's why Fiat intrinsic value is lower than its nominal value to prevent such actions.

When people start melting silver it is removed from the market and what remains is a currency That's perceived to be inferior.
Inflation increases the likelihood of Good money leaving the market and held while the reverse is the case of bad money.

[notocactus]

Thus, bad coins ended up dominating the market, and good coins disappeared.

Could something like this happen to Bitcoin?

I don't really get the ideas of bad coins and good coins here from Gresham's Law. Bitcoin is magic in a way that if you have private key, you can spend bitcoins belong to that private key. Bad or good coins, you all can spend it anytime by signing your transaction with private key and waiting for confirmations from Bitcoin miners.

In Bitcoin, there is only tainted coin and non-tainted coin but it's vague overlap between them in practice too. Bitcoin is fungible with a smallest unit is satoshi and it's really hard to know that your bitcoin is completely non-tainted, clean and not related to any past mixing activities. In addition, as a Bitcoin user I really don't care about that too.

In other words, are people starting to want to save their BTC coins so much that their value is lost?

It can help price to increase, not to decrease. Principle of Supply and Demand says it, and I agree it works for Bitcoin too.

Two articles I like

• Bitcoin and the Dunbar limit.
• The bullish case for Bitcoin.

[Kruw]

I saw this fun post that strips Gresham of credit for this concept: https://stacker.news/items/738907

[crwth]

This law seems to imply that people will hoard Bitcoin. This is based on my understanding of Gresham’s Law. If there are two kinds of money, bad money is the unlimited supply of Fiat, and good money is Bitcoin with its limited supply.

In terms of this, I hope that more people will save their Bitcoin and want it so that it won’t lose value. There are a lot of factors simply because I think of legality with the government as well, so maybe there would be a different thing for it, like a tax.

I think there are still a lot more things to consider.

[legiteum]

As others seemed to have mentioned here, you are misunderstanding this law.

It applies to the the same currency in two different physical forms e.g. US dollars denoted in copper coins vs. silver coins, wherein the latter would have more value (in USD).

For instance, silver quarters are kept by collectors as an investment because they are worth many times their face value of $0.25:

https://uscoinsandjewelry.com/item-details/100-face-value-90-silver-quarters-400-total-coins-1964-and-before/100FACEQTRS90

Also, remember that a currency can potentially be any one or more of three things:

1. An investment (or a means of storing value).

2. A means of value transfer (i.e. transacting).

3. A means of commonly known value measurement.

The USD is always all three of these things, and will always be #3 forever.

Bitcoin is mostly #1 today, and rarely #2, and will never be #3.

Fast and scalable digital currencies like Haypenny currencies can be #1 and #2, and will never be #3.

(Only currently well known currencies like USD, EU, GBP etc. will ever be #3).

[joker_josue]

As others seemed to have mentioned here, you are misunderstanding this law.

It applies to the the same currency in two different physical forms e.g. US dollars denoted in copper coins vs. silver coins, wherein the latter would have more value (in USD).

I didn't misunderstand this "law", so I gave the examples I did.

I discovered this law by listening to a conversation about Bitcoin. So ask if it would make sense to associate one thing with another.

Certainly nothing like this will happen to Bitcoin. But, I found it interesting to analyze/think about this in relation to Bitcoin and the failed fiat currencies.

[PrivacyG]

Could something like this happen to Bitcoin?
In other words, are people starting to want to save their BTC coins so much that their value is lost?

I do not understand your question to be honest.  Why would the value of Bitcoins be lost due to people wanting to save their Bitcoin?  How can this apply to Bitcoin which is a digital Asset and not something you can melt?

People saving their Bitcoins only leads to scarcer Bitcoin, I do not see why it would become a bad thing unless nobody wants to spend their Bitcoin any more.

[legiteum]

As others seemed to have mentioned here, you are misunderstanding this law.

It applies to the the same currency in two different physical forms e.g. US dollars denoted in copper coins vs. silver coins, wherein the latter would have more value (in USD).

I didn't misunderstand this "law", so I gave the examples I did.

I discovered this law by listening to a conversation about Bitcoin. So ask if it would make sense to associate one thing with another.

Certainly nothing like this will happen to Bitcoin. But, I found it interesting to analyze/think about this in relation to Bitcoin and the failed fiat currencies.

Ah, okay. I understand now.

But yeah, Bitcoin only has one possible manifestation, so Gresham's Law cannot apply.

[Ambatman]

Could something like this happen to Bitcoin?
In other words, are people starting to want to save their BTC coins so much that their value is lost?

I do not understand your question to be honest.  Why would the value of Bitcoins be lost due to people wanting to save their Bitcoin?  How can this apply to Bitcoin which is a digital Asset and not something you can melt?

People saving their Bitcoins only leads to scarcer Bitcoin, I do not see why it would become a bad thing unless nobody wants to spend their Bitcoin any more.

The melting of silver and metal when the intrinsic value is greater than the nominal
Was just an example to showcase how individuals hoard perceived better money
And push them out of the market and the bad remains in circulation.

I doubt if OP called it a bad thing, if people start holding it means they believe it's better to the alternative they would be spending.
But well the no value could mean more since its joker or it's a mistake.

[Free Market Capitalist]

It's a simple reasoning. If a coin is made of silver, it is easily worth 1$, but the amount of silver that this coin has is worth 2$. It's worth melting down that coin and selling the silver, rather than using the coin to buy something for 1$.

But, it explains the theory of Gresham's Law better.

I don't know where you get that from, it's just the other way around. If a silver coin is worth $1, it is worth $1, and what happened in ancient times is that to devalue the currency, starting with the Romans, instead of making silver coins they began to put alloys of copper and other metals in the silver in coins with supposedly a nominal value of $1, but people soon realized that it was not pure silver and when carrying alloys of other impure metals they asked for more coins to pay the same as if they were coins of only silver.

I didn't misunderstand this "law", so I gave the examples I did.

I discovered this law by listening to a conversation about Bitcoin. So ask if it would make sense to associate one thing with another.

Certainly nothing like this will happen to Bitcoin. But, I found it interesting to analyze/think about this in relation to Bitcoin and the failed fiat currencies.

There are several of us who believe that you have misunderstood it, and I don't want to turn this into a battle of egos, it's okay to misunderstand something.

Could something like this happen to Bitcoin?
In other words, are people starting to want to save their BTC coins so much that their value is lost?

No, I don't think anything similar can happen to bitcoin.

[Reatim]

Could something like this happen to Bitcoin?
In other words, are people starting to want to save their BTC coins so much that their value is lost?

I think it already is happening to some extent.

Not that I think its value is already being dwindled down however I do notice, even in myself and a lot others, they tend to save their bitcoins and hold instead of using it to purchase something not that huge anyway. Who would spend a couple of satoshis to buy a water bottle for example? No one. Even if you have 0.0001 sat, you would want to hold on to it and let it grow.

However, it is not all lost because bitcoin is still a currency first and foremost. Despite many opting to hold bitcoin, a lot still use it as a currency to make their transactions. We can see this with businesses using bitcoin to receive payments.

[FortuneFollower]

Could something like this happen to Bitcoin?
In other words, are people starting to want to save their BTC coins so much that their value is lost?

I think it already is happening to some extent.

Not that I think its value is already being dwindled down however I do notice, even in myself and a lot others, they tend to save their bitcoins and hold instead of using it to purchase something not that huge anyway. Who would spend a couple of satoshis to buy a water bottle for example? No one. Even if you have 0.0001 sat, you would want to hold on to it and let it grow.

However, it is not all lost because bitcoin is still a currency first and foremost. Despite many opting to hold bitcoin, a lot still use it as a currency to make their transactions. We can see this with businesses using bitcoin to receive payments.

Big companies and some services are using BTC as a means of payment, however, I do think that the trend and the general opinion would stay for BTC to be a big storage of value put into a crypto space with the benefits that it provides for everybody.
As it was said, who said that BTC needs to be a currency for daily life? It's more like a dream for some people.

[hugeblack]

The concept of "good money" and "bad money" applies to a gram of gold, for example, being overvalued. If a gram of gold is worth $100, then a gram of gold that is traded somewhere is worth $110. But since the Nixon shock, all money in circulation is much higher than the value of the paper that is printed. The cost of printing $100 is about 9.4 cents per note, so all money in circulation today is bad money.

With Bitcoin, this concept could happen if KYC were strictly accepted so that Bitcoin that comes from mixers is worth less than Bitcoin that comes from the government. This would be the end of Bitcoin.

[betswift]

The concept of "good money" and "bad money" applies to a gram of gold, for example, being overvalued. If a gram of gold is worth $100, then a gram of gold that is traded somewhere is worth $110. But since the Nixon shock, all money in circulation is much higher than the value of the paper that is printed. The cost of printing $100 is about 9.4 cents per note, so all money in circulation today is bad money.

With Bitcoin, this concept could happen if KYC were strictly accepted so that Bitcoin that comes from mixers is worth less than Bitcoin that comes from the government. This would be the end of Bitcoin.

Would such KYC be accepted everywhere, to begin with?..I don't think so.. But a good analogy and analysis behind it, thanks!

[vjudeu]

Could something like this happen to Bitcoin?

Of course. For example: you have a lot of bad altcoins, which are terrible, when it comes to preserving any value, but they are great, when it comes to transacting. Also, that's why Bitcoin domination is decreasing over time.

same currency in two different physical forms

Then, you can compare Bitcoin with Lightning Network or with sidechains.

Bitcoin only has one possible manifestation, so Gresham's Law cannot apply

What about test coins, like testnet3 or testnet4? If you check https://altquick.com/exchange/ and look at "Weekly BTC volume", then testnet3 is usually at the top. And if you look at https://mempool.space/testnet then you will see, that the network is so congested, that you can get around 40 tBTC from fees alone, and 2 GB of block data, worth 2500 tBTC, is waiting for confirmation.

Also, there is a way, to wrap BTCs, and make an altcoin out of that, while maintaining 1:1 peg, and while having peg-ins and peg-outs, in a form of real BTC transactions. So, there is definitely more than "one possible manifestation", because you can always "sign coins, to peg them in", and then "move coins, to peg them out".