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Author Topic: Does bitcoin suffer from Gresham's law?  (Read 2335 times)
Robert Paulson
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September 05, 2014, 10:32:33 AM
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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.



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September 05, 2014, 10:42:45 AM
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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.

All previous versions of currency will no longer be supported as of this update
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September 05, 2014, 11:54:45 AM
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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.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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September 05, 2014, 12:57:01 PM
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currency does not have to be physical, indeed most currencies today are digital.
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September 05, 2014, 01:03:55 PM
 #5

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.




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 Huh
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September 05, 2014, 03:25:23 PM
Last edit: September 05, 2014, 03:38:41 PM by johnyj
 #6

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

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September 05, 2014, 03:40:02 PM
 #7

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.
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September 05, 2014, 06:41:08 PM
 #8

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

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.
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September 05, 2014, 07:41:43 PM
 #9

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

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
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September 05, 2014, 08:21:23 PM
 #10

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... Grin

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September 05, 2014, 09:42:56 PM
 #11

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!
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September 05, 2014, 10:28:51 PM
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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

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

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)

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September 06, 2014, 01:37:44 AM
 #13

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%.
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September 06, 2014, 01:47:57 AM
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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.

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September 06, 2014, 01:56:54 AM
 #15

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

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

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)

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
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September 06, 2014, 02:16:16 AM
 #16

You dont need to spend ONE BTC you know?  Roll Eyes
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September 06, 2014, 03:15:07 AM
 #17

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

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

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

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September 06, 2014, 04:13:58 AM
 #18

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.

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.
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September 06, 2014, 06:13:38 AM
 #19

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.
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.

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September 06, 2014, 09:45:36 AM
Last edit: September 06, 2014, 10:10:46 AM by Nicolas Dorier
 #20

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

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

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)

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

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

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