Topic: Gresham's Law and Bitcoin (Read 499 times)

The topic about Gresham's law has been discussed more than 1000 times on the forum. Just search for old forum threads instead of posting another one.
Saving BTC so much that the value of BTC is lost? What does that supposed to mean? If the value of BTC is lost, saving BTC becomes pointless. The people are saving a currency or an asset because the future value/price of that currency/asset would be higher than the current price. If there's an expectation that the future price/value would be lower than the current price/value, nobody would start saving that particular currency/asset.

But for you to use manual coinjoin, you have to have confidence with the people you are going to do coinjoin.
Or do you do coinjoin with you? This will not bring great advantages to the medium term.

I think that any exchange, in fact, would be happy for the volumes and money flowing - however, the reality is harsher than that 
If you are a CEX - you abide, of course.

I think that Lighting Network and manual CoinJoin is the best safest possible method available right now. I can't trust any CoinJoin coordinator and mixer anymore. Yes, years ago it was a pure result of innovation and wish of development (and making money of course) but after so many years and so many hunts, I think that many of them are honeypots and it's difficult to guess which one to trust.

By the way, you are right. Binance is the perfect example of such an exchange. If there was not a law, Binance wouldn't care and accept absolutely every transaction, even if they knew it was illegal. They also have been helping to Chinese users to bypass KYC restrictions till they could.

Here is my take on all of this.

If you hold a soft money (fiat, diluted gold/silver, shaved coins) and a hard money (pure gold, bitcoin), you will want to keep the hard money as a store of value and you will want to spend away the soft money as a means of exchange.

Merely using fiat as a means of exchange doesn't really give it any value. If the mere action of passing a buck around gave it any value, we would just sit in a circle jerk and pass around a $1 bill until it gains more value.

Value is based on demand and supply. Changing hands does not increase the value of anything. If so, my ex wife would be worth millions.

People will stash away hard money, and spend away soft money. It's simple logic. Fiat will keep being used as a means of exchange until we run out of idiots to accept it from us.

Bitcoin will only gain in price as more of use store our value into it, and save it away in cold storage. Not being used as a means of exchange is only a testament to the value of bitcoin. It's not detrimental to bitcoin.

If useage as a means of exchange was required to remain valuable, gold and bitcoin would drop in price as fiat would gain value. The other way around is happening.

That's just wonderful, much appreciated for putting such a big work through!
On a side note and being off-topic a bit, when I went to your website, downnnn below, there are - two - donation buttons. And they lead to the same place.
Is it supposed to be that way?

With mixers it's usually* the other way around.

They do an excellent job at obfuscating the origin of bitcoins through several coinjoins, but this comes at the cost of "risk assessment programs" blacklisting them.

Same deal with Wasabi coordinators.

Exchanges really really do not want you to send them funds from a mixer, they don't like those funds because it gives them legal headaches and regulatory problems. If they could accept them, they would, as it's good for business. But they can't, so that's why they freeze them all the time.

*There is one family of mixers that do give you "good" coins all the time, by giving you coins that investors sell to them. They are listed here.

Never truly digged into how the "bad" becomes "good" after going through the mixers and such.
Who would be an auditor in such a case, or it's better just to find the articles and threads on that matter myself? (if the processes we are regarding a pretty webbed into one another)
Would be much appreciated if you have an idea of how it usually is.

That means it can also be applied to "good BTC" (UTXOs that exchanges consider clean) and "bad BTC" (coins that are tainted somehow).

People are eager to dump their bad BTC, and keep the good BTC for themselves.

So you'd think that this would have to come crashing down eventually, and damage bitcoin, right?

Well, not really.

For one thing, the regulated centralized services hold and deal with more Bitcoin than the darknet does.

Another thing to note is that seized BTC magically becomes "good" again as if an auditor just flips a switch and suddenly all of the bad traces are gone.

Agreed.
Or only accept those who are probably not interested to have money with a black mark on em 

I agree we shouldn’t be using centralized crypto exchanges but sadly they are the FIAT gate keepers so we don’t really have much alternatives in reality. P2P isn’t always the most convenient solution.

You are also right with your FIAT example however, the exchanges lock the crypto accounts much more times than banks lock their customers FIAT accounts so again, the reality is somewhat different than what people want to believe.

In the end sending crypto to a crypto exchange is dangerous especially if you are not sure about the origin of your funds.

Try it and let us know the results if you like.

I don't think that Gresham's law is applicable on Bitcoin because as we all know that 1 Bitcoin is always going to be one Bitcoin, due to market conditions Bitcoin might lose its current value but that thing will apply to all Bitcoin not just 1 Bitcoin or in simple words there's no concept of good or bad money when it comes to Bitcoin. If someone still wants to apply then concept then in laymen terms bad Bitcoin might be the ones with high AML score and the good one might be the ones with low AML score, but I guess there are services that can lower that AML score of Bitcoin.

Same goes for fiat, if the bank decides to freeze your bank account. The solution to having 1 BTC = 1 BTC is to avoid giving the cryptocurrency exchanges a reason to freeze your account. Or better yet, do not use centralized exchanges.

It doesn’t make it any different for me unless there will be some consequences but there will be some consequences if the coins I have in my wallet came from a blacklisted wallet. The exchange will freeze my deposit immediately if I send any coins to the exchange so in the end it makes a difference. I wish that wasn’t the way how things are but the reality is very different than what people would like it to be.

1 btc is indeed 1 btc as long as the exchange doesn’t seize your funds. Then 1 btc equals to zero btc. You are free to try.

This is an interesting point. Bitcoin really is something new and different from everything that has been done throughout history in relation to money.

But society continues to apply traditional laws and rules associated with fiat. This should be stopped doing now.
Should we, as Bitcoin users, stop using these ideas in all scenarios?

1BTC=1BTC.

There is no such thing as a bad Bitcoin. And Bitcoin is also a new type of money, so a law based on the observation of ancient physical coins being melted down, might not even have an effect on BTC. How would you melt down a Bitcoin?

If governments start implementing "bad and good" Bitcoin, then they will have a problem trying to confiscate and stop the transactions of "bad" Bitcoin. In fact, they will find it an impossible task, since Bitcoin is decentralized and non-custodial(as long as you maintain control over your own personal, decentralized and non custodial wallet).

Bad money does indeed push good money out of the market. But this does not mean that good money disappears from our world. Gold bars and gold coins, for example, have not disappeared.

They are stored in the vaults of central banks of all countries of the world (since their value is generally recognized). This is what will most likely happen to Bitcoin over time. Bitcoin is an ideal reserve asset. Bitcoin will become part of the gold and foreign exchange reserves of central banks. To do this, it is enough to make changes to the documents of the Basel Committee.

At the same time, people will very rarely use Bitcoin in everyday transactions (instead of Bitcoin, digital currencies of central banks will be used for these purposes).

This isn't some method where you could end up with terrible results based on currency part, it's something about how it could be great for the asset part of it. The Gresham law idea is because fiat is worse than bitcoin, that means we are going to use to pay for stuff, and we are going to keep our bitcoin to ourselves, which isn't wrong and I believe that is why the price of bitcoin went up.

After all, people wanted to keep their coins, and didn't want to use it as a currency, which made the market have less liquidity, and this is why the price went up when buyers couldn't find cheap coins. So, this makes bitcoin a bad currency to spend, but a great asset to keep hold of and that is how the past has happened so far. I am not saying we are going to end up with terrible results at any given moment, we could definitely see better results for currency part too, but that is not just because people think it's good, that part also is mainly because its expensive fees for tx and slow to move around.

Don't want to keep the vector you've got for it regarding Trump - but in general, for now, crypto is now used for some transactions for some services. Does it make the overall process dirty or different? (the idea of being rewarded for some service) No. Does it change because of the blockchain and the benefits of different coins for different reasons - yeah 

I can liken the concept to your narration, Bitcoin is the good money because it's a store of value and that is why people hodl it. Fiat becomes the bad money that is commonized and people prefer to use it for the payment of their daily needs. Most people that holds Bitcoin will rather not spend it because they know that the value will continue to increase in the future, so they'll rather spend fiat that can be vulnerable to inflation. Although in practical the high value of Bitcoin is making it to deviate as a digital cash that it was created to be. I however don't believe that the value of Bitcoin will be lost because people will rather hodl it than use it for p2p transactions. It can be likened to a valuable asset like gold, despite not using it for payment, it's value still retains.

I saw "Richard Hearts law" made to a script like a calculator. Mathematical defendable. You punch something in and it sticks to the same numbers if your repeat the example. Should count for something. You Law making citizens.

It's about liquidity and gains. Time for my beer. Love you guys.

Firstly, let's try and understand what this law is talking about

This law is basically trying to explain to us that when 2 currencies(bad and good) have equivalent value is available in an economical system, the bad money will eventually drive out the good money from circulation

Secondly, let us understand the difference between the terms "good money" and "bad money
Well, by the law, I think good money is referring to money with more value or better quality
While bad money has less value in the economy

Now let us understand why the bad money ends up overthrowing the good money
And to me, the fundamental reason for this according to what you explained is due to the fact that people tend to hold the good money to themselves and spend the bad money and this will eventually lead to bad money being more circulated than good money

Now, to the matter at hand
You believe that this can end up happening to Bitcoin, but I'm here to tell you that you have nothing to worry about. This law can't apply to Bitcoin
Why? You may ask
Well
1-by the definition I made, they said 2 currencies of equivalent value
Bitcoin has no mate, has no competition, and has no other crypto currency with equivalent value
I know you may say fiat can be considered it's rival but to me, Bitcoin itself is above any fiat, or is there any currency that a single unit of it costs $67,000
Well, if you still have doubts about that reason, let me go for 2
2- Bitcoin is limited, unlike fiat, which can be printed endlessly by the government
The last point I can think of would probably be the fact that Bitcoin, unlike fiat, is a digital currency so.i ser nor reason why this law can affect Bitcoin

The only scenario where I think this can occur is if there's a law worldwide that is basically against Bitcoin and causing fiat to be more favourable to Bitcoin

I think this law applies to almost everything in life.

When you mix clean shirts with dirty shirts, dirty shirts don’t come up clean. It is the clean shirts that become dirty.

In a healthy population, when corrupt people don’t get punished hard enough, they keep spreading, affecting the honest law abiding individuals and in the end, everyone becomes a criminal.

So, bad money drives away good money.

That’s also the reason why many nations are embracing protectionism lately. Trump wants to stop illegal immigrants coming to the US because illegal immigrants raise the crime rates. Bad people drive away good people. Vote Trump and stop this madness.

There is also a psychological thing behind this story of (good) and (bad) money. People, when they feel that a coin or a bill has more value, they tend to get attached to it, as if it were a personal treasure. This is perhaps why some people keep their Bitcoin safe, hoping that it will become a kind of (digital luxury) instead of a currency that we use every day. In the end, the value we give to a currency is not just numbers, it is also a question of rarity and trust.

Here you are talking about physical coins, metals, which have different values. In the case of bitcoin ("gold") there are no other "metals". If you offer altcoins as alternatives to "silver" (but don't include litecoin here) and "bronze", then this will be an incorrect comparison, because all this doesn't compare to bitcoin. Altcoins can't be "melted" into the original more valuable metal, because it was garbage and remains so.

If some try to save their bitcoin, it doesn't mean that others will lose the desire to possess the same thing. This will lead to the fact that the more some try to save, the less of it will go to those who want to possess it, which in turn will spur the growth of the cost of bitcoin.

The centuries when money had physical value are far behind. Money now is just a piece of paper that does not have any physical or practical value (similar to Gresham's law, the paper from which the money of African countries is made is more profitable to hand over to waste paper? ). And in the future - it will be only 1 and 0 in the system code.

Sometimes weak miners have to do it and it's natural selection in Bitcoin mining industry. Weak miners with small capital, and bad capital and risk management will be forced to leave this industry.

Strong, experienced miners with good capital and risk management, good strategies will not sell their coins below cost of production from mining, like you said, but it does not apply for all Bitcoin miners.

Miner capitulation.

I don't think this can happen to Bitcoin. Of course, people save Bitcoin and spend fiat, but they don't save their Bitcoin because it is "good money"; they do so because it's a good asset.
I've seen situations where a person decides to use old and wrinkled fiat currency and save the freshly printed mint, but those kinds of situations are not significant enough to cause anything to happen.

Demand and supply drive the value of currencies or assets, so as long as there is a demand for Bitcoin, it will always have value. The more people save it, the more the value will rise and that will drive more people to invest in it because they wont want to miss out and this will further drive the value up.

Yes, because people wouldn't sell their coins below the costs of producing them. That's why you could see testnet4 coins, sold at 20 satoshis per 1 tBTC, and now, when CPU miners already dumped their coins, and ASIC miners started to produce blocks with CPU difficulty, the price starts rising, and suddenly reached 30 satoshis per 1 tBTC. Just because the costs of producing a single tBTC raised.

But that's what I understood. Maybe it wasn't explained well to me - my English isn't very good and sometimes the meaning of the sentences can give you the wrong idea.  


In fact, Bitcoin does not have a value based on a metal or physical good. Therefore, it will be somewhat complicated for this “law” to be applied to Bitcoin.


But, if the value of ASICs were 90% cheaper, could this cause a devaluation in the value of Bitcoin? Can the logic of this theory be applied in some way?

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.

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

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".

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

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.

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.

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.

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.


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.


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

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.

Ah, okay. I understand now.

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

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.

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.

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).

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.

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

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.

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.

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.
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.


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.

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.

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.

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


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?


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

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.

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."


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?