We cover what Gresham’s law is, how it relates to bitcoin, and whether bitcoin exhibits characteristics of good money as it relates to Gresham’s law.
Investopedia states: “Gresham’s law is a monetary principle stating that ‘bad money drives out good.’ It is primarily used for consideration and application in currency markets.
Logically, people will choose to transact business using bad money and hold balances of good money because good money has the potential to be worth more than its face value.
The overwhelming use case of bitcoin today is that of a store of value savings mechanism.
Couple that with the fact that bitcoin is classified as property by the Internal Revenue Service, meaning every transaction is a taxable event, and we can quickly understand why bitcoin is saved and not spent.
So, it’s easy to see why people tend to spend dollars instead of save dollars, as it’s not logical to store something that is programmed to decrease in value over time and call it “savings.” The reckless money printing that has occurred in the past 18 months has led more and more people to realize that they should be spending their dollars as fast as they can, and accumulating hard assets to save.
In the very best case scenario, your purchasing power would have eroded by over 50% in the last decade due to the monetary debasement of money printing.
Conversely, bitcoin is becoming better money as time goes on and more people start to recognize its value as a means to store wealth safely into the future.
Simply put, bad money is like a hot potato and people are incentivized to get rid of it as fast as they can.
Eventually, once the majority of people are saving in bitcoin, it will transition from primarily being used as a store of value to also being used as a medium of exchange.