Greshams Law
Gresham's law is a principle that states that "bad money drives out good" and can be applied to the currency markets.
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Historical Context
Sir Thomas Gresham lived from 1519 to 1579 and wrote about the value and minting of coins while working as a financier and later founded the Royal Exchange of the City of London.
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When Henry VIII changed the composition of the English shilling, replacing a substantial portion of the silver with base metals, citizens separated the English shilling coins and hoarded the coins containing more silver which were worth more than their face value.
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Gresham observed that bad money was driving out good money from circulation. Bad money is a currency with equal or less value than its face value. Good money has the potential for a greater value than its face value.
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Gresham stated that: People will choose to use bad money first and hold onto good money.
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The Scottish economist Henry Dunning Macleod attributed this law to Gresham in the 19th century.
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Greshams Law Doesn't always work
If we advance a couple thousand years, we see that the idea that "...bad money drives out good" does not appear to be true when we look at the U.S. Dollar
- What is the most desired currency in the world? The US dollar.
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The US Dollar
The US Dollar is probably the most hated currency in the history of money, but in most of the second and third world, the US dollar is preferred over native currencies.
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The fact that most countries have a legal tender, and people are compellled by law to use it, but they often prefer dollars to the extent that most 2nd and 3rd world countries have two prices for most goods; one in dollars and another in the countries legal currency... suggests that Greshams Law does not always apply. However, as we see in many nations, even this does not stop the desire for US dollars.
The U.S. Dollar is simply the best money. This is why the US Dollar is the medium of exchange in the world, due to it's percieved value, which is probably based on the strength of the US Economy, the strength of the US Government, and thus Trust in the US Government issued currency, the US Dollar.
As a result, it is the global currency with the greatest depth, liquidity, sophistication, and distribution.
It is even referred to by most economists and foreign governments as the Global Currency.
Bitcoin: is Bitcoin the cryptocurrency version of Good Money?
- This brings us to our next question?
- Is BItcoin Good Money?
- And has Bad Money driven Bitcoin out of circulation?
Hmmmm.. well in a word, no.
- We know that since the time that Bitcoin was first used to buy a pizza until now, it is not a widely used medium of exchange because it's value in USD and other currencies is unpredictable. It is hard to predict what the value will be from morning to evening, and also hard to predict it's value from Monday to Friday.
- And we know that while Bitcoin is an option in some, Point of Sale Retail transactions, that Bitcoin has had very limited use as Money, as in a medium of exchange.
- However, if we are honest, we also can see with our eyes that there are cryptocurrencies with stable prices, which can be used as a store of value and as payment for labor, goods or services. And those cryptocurrencies are called stablecoins, and the most wodely used as a medium of exchange are based on the US Dollar, as in USDT or Tether, and USDC US Dollar Coin.
- If we are honest, it is no surprise that the US Global Currency is the US Dollr, therefore the cryptocurrency which could be labelled the Global Cryptocurrency is based on the US Dollar, USDT or Tether.
- The true irony is although there is a popular narrative that the US Dollar is not backed by anything solid, since it was taken off the Gold Standard in the 1970's, that doesn't effect it's use as the Global Currency.
- The same can be said for USDT or Tether. It has often been rumored that Tether is not truly backed one to one with US Dollars, it has never failed to pay back dollars for USDT redeemed at it's website.
- And it is still the worlds most dominant cryptocurrency period, stablecoin or non-stablecoin.
- USDT or Tether is the global cryptocurrency with the greatest depth, liquidity, sophistication, and distribution.
- In My Humble Opinion so called Bad Money has not driven Bitcoin out of circulation, instead Bitcoin acting like Bad Money, has driven Bitcoin out of circulation and limited it's use as Good Money or the Global Cryptocurrency.
- Don't get me wrong, I own Bitcoin, and will continue to buy Bitcoin, as a longterm store of value and investment. But for everyday cryptocurrency medium of exchange, and to store value from crypotocurrency trades, I use USDT or USDC, stablecoins are STABLE and have the infrastructure to become widespread mediums of exchange.
