Hi, Pablo here
- + +Hi, Pablo here
+ ++
Gresham's Law has nothing to do with Bitcoin
++ This is going to be a thorough explanation for a simple thing, but we + will take it slow since this topic somehow causes loads of confusion. +
++ Okay, so there are a lot of people in Bitcoin circles who talk about + Gresham's + Law. They often say, “Gresham's Law states that bad money drives out + good money”, then relate it to Bitcoin and the USD, and finally + proceed to reason all sort of of things on top of that. But here's + some very much needed clarification: Gresham's law has nothing to do + with Bitcoin's relationship to the USD. In fact, it actually has + nothing to do Bitcoin, or with the current USD for that matter. +
+ ++ Gresham's Law is relevant to a very specific type of monetary system: + when we used coins that contained precious metals (spoiler: we don't + live in that period of history anymore). The law states that bad money + drives out good money, but what a lot of Bitcoiners seem to miss is + the actual meaning of “good” and “bad” in this context. People tend to + interpret “good” and “bad” as meaning “hard” and "easy" money, so they + reason something like: “Because Bitcoin is harder than the USD, + Gresham's law applies here.” But that is not what Gresham's law is + about at all. +
+ ++ In the context of Gresham's law, “good” and “bad” refer to face value + versus commodity value. That doesn't ring a bell? Let me explain: +
+ ++ Imagine a magic land where there is only one type of coin. There's no + other money — just this one coin. These coin states on themselves that + they contain one gram of gold, and right now, they really do contain + one gram of gold. Everyone uses it, and everyone is happy. There's no + “bad” money, no “good” money — it's all nice and simple. +
+ +Now, let's spice it up a bit.
+ ++ After some time, a cheeky bastard (typically, a king) comes along and + starts making coins that look exactly like the original coins. I'll + call these the bad coins. The original coins will be the good coins. + Both types of coins say on them “one gram of gold,” but the bad coins + only have half a gram of gold actually in them (hence why they are + bad). +
+ +
+ So, to recap:
+ - Good coins: one gram of gold on the coin, and actually one gram of
+ gold inside.
+ - Bad coins: one gram of gold on the coin, but only 0.5 grams of gold
+ inside.
+
This is where Gresham's Law applies.
+ ++ People in this coiny fantasy land are not stupid — they know that the + gold content is what matters. At some point, someone will realize the + bad coins don't have as much gold as they claim and will develop a + preference for the good ones. So, if I'm John the Blacksmith and I + want to buy some iron, and I have a stash of coins — some good, some + bad — I would rather keep the good coins and spend the bad coins. Why? + Because I want to keep as much gold as possible, of course. +
+ ++ What happens eventually is that people grow into the habit of trying to get + rid of the bad coins and hold on to the good coins. They exploit the + confusion created by the fact that all coins have the same face value + (it says “one gram” on all coins, so everyone assumes they're worth + the same), even though the actual commodity value (the gold inside) + differs.[1] +
+ +That is the quick explanation of Gresham's law.
+ ++ Now, back to the original point: what are the face value and commodity + value of Bitcoin? +
+ ++ That makes no sense! Bitcoin is not a physical coin with metal in + it. It has no concept of face and commodity value. And neither does the + USD nowadays. Therefore, Gresham's law has absolutely nothing to do + with Bitcoin, the USD and any preferences the world might develop + between the two. +
+ ++ Hopefully, this explanation helps make things clear. From now on, if + you want to keep your public image intact, please refrain from + invoking Gresham's law when discussing Bitcoin and USD — because doing it + shows you don't know what Gresham's Law is actually about. Don't feel + too bad if it happened to you though: it can happen even to + massive + exchanges with a great reputation. +
+ ++ [1] Not relevant to the point of this post, but it's worth noting + that Gresham's Law situation is not always sure to happen in the + described scenario. If the difference between the good and bad coins + is massive, and no force opposes it, the market might jump into + Thier's Law + instead. +
-
Gresham's Law has nothing to do with Bitcoin
-- This is going to be a thorough explanation for a simple thing, but we - will take it slow since this topic somehow causes loads of confusion. -
-- Okay, so there are a lot of people in Bitcoin circles who talk about - Gresham's Law. They often say, “Gresham's Law states that bad money drives out - good money”, then relate it to Bitcoin and the USD, and finally - proceed to reason all sort of of things on top of that. But here's - some very much needed clarification: Gresham's law has nothing to do - with Bitcoin's relationship to the USD. In fact, it actually has - nothing to do Bitcoin, or with the current USD for that matter. -
+ +- Gresham's Law is relevant to a very specific type of moneteray system: - when we use coins that contained precious metals (spoiler: we don't - live in that period of history anymore). The law says that bad money - drives out good money, but what a lot of Bitcoiners seem to miss is - the actual meaning of “good” and “bad” in this context. People tend to - interpret “good” and “bad” as meaning “hard” and easy money, so they - reason something like: “Because Bitcoin is harder than the USD, - Gresham's law applies here.” But that is not what Gresham's law is - about at all. -
- -- In the context of Gresham's law, “good” and “bad” refer to face value - versus commodity value.That doesn't ring a bell? Let me explain: -
- -- Imagine a magic land where there is only one type of coin. There's no - other money — just this one coin. The coin states on itself that it - contains one gram of gold, and right now, it really does contain one - gram of gold. Everyone uses it, and everyone is happy. There's no - “bad” money, no “good” money — it's all nice and simple. -
- -Now, let's spice it up a bit.
- -- After some time, a cheeky bastard (typically, a king) comes along and - starts making coins that look exactly like the original coins. I'll - call these the bad coins. The original coins will be the good coins. - Both types of coins say on them “one gram of gold,” but the bad coins - only have half a gram of gold actually in them (hence why they are - bad). -
- -
- So, to recap:
- - Good coins: one gram of gold on the coin, and actually one gram of
- gold inside.
- - Bad coins: one gram of gold on the coin, but only 0.5 grams of gold
- inside.
-
This is where Gresham's Law applies.
- -- People in this coiny fantasy land are not stupid — they know that the - gold content is what matters. At some point, someone will realize the - bad coins don't have as much gold as they claim and will develop a - preference for the good ones. So, if I'm John the Blacksmith and I - want to buy some iron, and I have a stash of coins — some good, some - bad — I would rather keep the good coins and spend the bad coins. Why? - Because I want to keep as much gold as possible, of course. -
- -- What happens then is that people try to get rid of the bad coins and - hold on to the good coins. They exploit the confusion created by the - fact that all coins have the same face value (it says “one gram” on - all coins, so everyone assumes they're worth the same), even though - the actual commodity value (the gold inside) differs.[1] -
- -That is the proper explanation of Gresham's law.
- -- Now, back to the original point: what are the face value and commodity - value of Bitcoin? -
- -- That's makes no sense. Bitcoin is not a physical coin with metal in - it. It has no concept of face and commodity value. And neither is the - USD nowadays. Therefore, Gresham's law has absolutely nothing to do - with Bitcoin, the USD and any preferences the world might develop - between the two. -
- -- Hopefully, this explanation helps make things clear. From now on, if - you want to keep your public image intact, please refrain from - invoking Gresham's law when discussing Bitcoin and USD — because it - shows you don't know what Gresham's Law is actually about. Don't feel - to bad if it happened to you though: it can happen even to - massive exchanges with a great reputation. -
- -- [1] Not relevant to the point of this post, but it's worth noting - that Gresham's Law situation is not always sure to happen in the - described scenario. If the difference between the good and bad coins - is massive, and no force opposes it, the market might jump into - Thier's Law - instead. -
-- - -