I have heard many different people tell me about how Gresham's Law means that cryptocurrencies will never be successful. These thoughts come mainly from two camps. The first group are the skeptics that think that cryptocurrencies have no real value and that Gresham's law is just another nail in the coffin. There is not much we can do for these people. The second group are the people that want cryptocurrencies to succeed but are discouraged because of Gresham's law. This article is for the second group!
What is Gresham's Law?
"Bad money drives out good money" or in other words, if you can spend two types of money, you are generally going to want to spend the bad money and keep the good money. Eventually all the good money will be out of circulation and the bad money will be what people use. (If you want to know what makes money "good" or "bad" check out my post about how money gets its value)
"But Joe! You just proved that cryptocurrencies are doomed because it will be hoarded out of circulation!"
Not so fast!
This is the simple way to describe Gresham's law but it is incomplete and leads to much of the misunderstanding.
Gresham's law was named after Sir Thomas Gresham (1519–1579) in 1860 by Henry Dunning Macleod. This wasn't the first time this idea was put forward.
Gresham's law states that "if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will disappear from circulation. source (emphasis added)
There is an extremely important condition in that law that everyone seems to overlook! It has to be accepted BY LAW!
Lets do an example (this is actually the example that led to the forming of the law in the first place), the english government had a silver shilling. It was worth, well, a shilling... King Herny VIII decided it would be a good idea to make the shilling with 40% less silver and replace it with other metals. These new shillings were by law to be accepted as the same value as the old shillings. People aren't stupid (well, not too stupid) and they started hoarding the old shillings because they were worth more even though the government said they weren't. This is how Gresham's law came to be. The "good" money (the old shilling made of pure silver) and the "bad" money (the new shilling with less silver) were decreed by law to be the same value even though they are not!
"So wait! are you saying that it's the government that creates the problem that leads to Gresham's law?"
Pretty much, are you suprised?
"I guess not... but how does this apply to cryptocurrencies?"
I'm glad you asked. IT DOESN'T! There is no law that states how much cryptocurrencies have to be worth. The only way it would apply is if the government said 1 bitcoin is equal to $100 in every store in our country and if you don't accept that, we will throw you in a cage! Who is going to spend their bitcoins for $100? No one, therefore the dollar would be used as the currency and bitcoin would be hoarded and spent elsewhere.
"Well, if Gresham's law doesn't apply to cryptocurrencies, is there some other law that does"
Wow, you knew right where I was going with this didn't you!?
Thiers' Law: Good Money drives out Bad Money
Thiers' Law is basically the opposite of Gresham's Law. It states that "If given the choice of what money to accept, people will transact with money they believe to be of highest long-term value. In short, in the absence of legal tender laws, the seller will not accept anything but money of certain value (good money), while the existence of legal tender laws will cause the buyer to offer only money with the lowest commodity value (bad money) as the creditor must accept such money at face value." source / summary of source
To put it simply, if I have "bad" money and "good" money, and the government doesn't have any laws regarding their value to each other, a seller will only accept the "good" money, or at least give discounts for using the "good" money.
Real world examples:
1923: During the great Inflation in the Weimar Republic people stopped accepting official government money
2009: Zimbabwe, their hyperinflation got so bad that they now just use USD as their official currency.
Now: In Venezuela many stores and local businesses won't accept the bolivar as payment
"What about for cryptocurrencies? Are there any examples?"
We are starting to see examples of this working with cryptocurrencies:
Merchants are giving discounts for payments made in bitcoin
Some online stores exclusively accept bitcoin or other cryptocurrencies
Conclusion
So what does this mean?
It means that like most things, when you get the government out of the way, the free market decides what will win.
Unless there is a law stating the exchange rate of currencies, "good" money will drive out "bad" money.
Based on my post here, cryptocurrencies are "better" money than central bank money in most ways, therefore it will eventually drive central bank money out of circulation. (That is of course if everything remained the same as it is right now, and they won't, so we don't know who the eventual winner will be, we just know that if everything stays the same, cryptocurrencies should win)
Hopefully that all makes sense. I hope you guys learned something and enjoyed my post.
Any and all suggestions are welcome. I am just getting started on steemit so let me know if I can do anything better! Good content will drive out bad content! (hopefully)
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If you have anything you want me to research, let me know and I'll try to give you my thoughts on it in a future post.