gresham's article
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Pablo Martin
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<h2 id="writings-header">Writings</h2>
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<h2 id="writings-header">Writings</h2>
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<p>Sometimes I like to jot down ideas and drop them here.</p>
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<p>Sometimes I like to jot down ideas and drop them here.</p>
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<ul>
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<ul>
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<li>
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<a href="writings/gresham-law-has-nothing-to-do-with-bitcoin.html" target="_blank"
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rel="noopener noreferrer">Gresham's Law has nothing to do with Bitcoin</a>
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</li>
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<li>
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<li>
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<a href="writings/my-tips-and-tricks-when-using-postgres-as-a-dwh.html" target="_blank"
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<a href="writings/my-tips-and-tricks-when-using-postgres-as-a-dwh.html" target="_blank"
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rel="noopener noreferrer">My tips and tricks when
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rel="noopener noreferrer">My tips and tricks when
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public/writings/gresham-law-has-nothing-to-do-with-bitcoin.html
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<!DOCTYPE html>
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<html>
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<head>
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<title>Pablo here</title>
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<meta charset="utf-8" />
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<meta viewport="width=device-width, initial-scale=1" />
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<link rel="stylesheet" href="../styles.css" />
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</head>
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<body>
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<main>
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<h1>Hi, Pablo here</h1>
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<p><a href="../index.html">back to home</a></p>
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<hr />
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<section>
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<h2>Gresham's Law has nothing to do with Bitcoin</h2>
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<p>
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This is going to be a thorough explanation for a simple thing, but we
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will take it slow since this topic somehow causes loads of confusion.
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</p>
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<p>
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Okay, so there are a lot of people in Bitcoin circles who talk about
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<a
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href="https://en.wikipedia.org/wiki/Gresham%27s_law"
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target="_blank"
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rel="noopener noreferrer"
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>Gresham's Law</a
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>. They often say, “Gresham's Law states that bad money drives out
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good money”, then relate it to Bitcoin and the USD, and finally
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proceed to reason all sort of of things on top of that. But here's
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some very much needed clarification: Gresham's law has nothing to do
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with Bitcoin's relationship to the USD. In fact, it actually has
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nothing to do Bitcoin, or with the current USD for that matter.
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</p>
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<p>
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Gresham's Law is relevant to a very specific type of moneteray system:
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when we use coins that contained precious metals (spoiler: we don't
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live in that period of history anymore). The law says that bad money
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drives out good money, but what a lot of Bitcoiners seem to miss is
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the actual meaning of “good” and “bad” in this context. People tend to
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interpret “good” and “bad” as meaning “hard” and easy money, so they
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reason something like: “Because Bitcoin is harder than the USD,
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Gresham's law applies here.” But that is not what Gresham's law is
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about at all.
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</p>
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<p>
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In the context of Gresham's law, “good” and “bad” refer to face value
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versus commodity value.That doesn't ring a bell? Let me explain:
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</p>
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<p>
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Imagine a magic land where there is only one type of coin. There's no
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other money — just this one coin. The coin states on itself that it
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contains one gram of gold, and right now, it really does contain one
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gram of gold. Everyone uses it, and everyone is happy. There's no
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“bad” money, no “good” money — it's all nice and simple.
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</p>
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<p>Now, let's spice it up a bit.</p>
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<p>
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After some time, a cheeky bastard (typically, a king) comes along and
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starts making coins that look exactly like the original coins. I'll
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call these the bad coins. The original coins will be the good coins.
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Both types of coins say on them “one gram of gold,” but the bad coins
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only have half a gram of gold actually in them (hence why they are
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bad).
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</p>
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<p>
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So, to recap:<br />
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- Good coins: one gram of gold on the coin, and actually one gram of
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gold inside.<br />
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- Bad coins: one gram of gold on the coin, but only 0.5 grams of gold
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inside.
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</p>
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<p>This is where Gresham's Law applies.</p>
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<p>
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People in this coiny fantasy land are not stupid — they know that the
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gold content is what matters. At some point, someone will realize the
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bad coins don't have as much gold as they claim and will develop a
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preference for the good ones. So, if I'm John the Blacksmith and I
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want to buy some iron, and I have a stash of coins — some good, some
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bad — I would rather keep the good coins and spend the bad coins. Why?
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Because I want to keep as much gold as possible, of course.
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</p>
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<p>
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What happens then is that people try to get rid of the bad coins and
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hold on to the good coins. They exploit the confusion created by the
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fact that all coins have the same face value (it says “one gram” on
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all coins, so everyone assumes they're worth the same), even though
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the actual commodity value (the gold inside) differs.<a
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href="#footnote-1"
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>[1]</a
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>
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</p>
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<p>That is the proper explanation of Gresham's law.</p>
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<p>
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Now, back to the original point: what are the face value and commodity
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value of Bitcoin?
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</p>
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<p>
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That's makes no sense. Bitcoin is not a physical coin with metal in
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it. It has no concept of face and commodity value. And neither is the
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USD nowadays. Therefore, Gresham's law has absolutely nothing to do
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with Bitcoin, the USD and any preferences the world might develop
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between the two.
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</p>
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<p>
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Hopefully, this explanation helps make things clear. From now on, if
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you want to keep your public image intact, please refrain from
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invoking Gresham's law when discussing Bitcoin and USD — because it
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shows you don't know what Gresham's Law is actually about. Don't feel
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to bad if it happened to you though: it can happen even to
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<a
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href="https://river.com/learn/terms/g/greshams-law/"
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target="_blank"
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rel="noopener noreferrer"
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>massive exchanges with a great reputation.</a
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>
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</p>
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<p id="footnote-1" class="footnote">
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<em
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>[1] Not relevant to the point of this post, but it's worth noting
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that Gresham's Law situation is not always sure to happen in the
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described scenario. If the difference between the good and bad coins
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is massive, and no force opposes it, the market might jump into
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<a
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href="https://en.wikipedia.org/wiki/Gresham%27s_law#Reverse_of_Gresham's_law_(Thiers'_law)"
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target="_blank"
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rel="noopener noreferrer"
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>Thier's Law</a
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>
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instead.</em
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>
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</p>
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<hr />
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<p><a href="../index.html">back to home</a></p>
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</section>
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</main>
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</body>
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</html>
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