{"id":11513,"date":"2022-01-27T21:45:00","date_gmt":"2022-01-27T21:45:00","guid":{"rendered":"http:\/\/ci02985c774000240b"},"modified":"2025-01-29T12:43:03","modified_gmt":"2025-01-29T12:43:03","slug":"what-is-nakamoto-greshams-law","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/business\/what-is-nakamoto-greshams-law","title":{"rendered":"What Is Nakamoto-Gresham\u2019s Law, And How Does It Pertain To Bitcoin?"},"content":{"rendered":"<div id=\"bsf_rt_marker\"><\/div><p>Bitcoin is money. That means it\u2019s openly competing with the incumbent fiat monetary regime. A co-circulation of two types of money isn\u2019t unprecedented, and the economic principle that describes the outcome is known as Gresham&#8217;s law. Applying Gresham\u2019s insight to the bitcoin-fiat dynamic, we find that HODLing is economically rational under current conditions. <\/p>\n<aside>\n<p>\u201cGood and bad coin cannot circulate together.\u201d&nbsp;\u2014 Thomas Gresham, 1558<\/p>\n<\/aside>\n<h2>The Hierarchy Of Monetary Needs<\/h2>\n<p>To understand the rationality of HODLing, let\u2019s briefly recap why an advanced civilization needs properly functioning money. <\/p>\n<p>Human action is purposeful behavior, and the foremost purpose on everyone\u2019s mind is to satisfy their most pressing needs first. If a person owns money and their basic needs are not satisfied, they will most likely choose to <em>exchange <\/em>their money for food, clothes and shelter before anything else. Only once their basic needs are satisfied can money be <em>saved <\/em>to obtain the satisfaction of more sophisticated needs in the future. <\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2025\/01\/73_image4.png\" title=\"\"><\/figure>\n<p>Money needs to work as a medium of exchange first and foremost. But the urgency of this function is quickly saturated and the store of value function of money quickly becomes the most important. <\/p>\n<h2>Medium Of Exchange Or Store Of Value?<\/h2>\n<p>We can illustrate the two functions of money and their relation in the form of buckets. The medium of exchange is the first bucket we need to fill in order to satisfy our basic needs. Once that bucket is full, it overflows into the store of value bucket. The medium of exchange bucket has a limited capacity, as there are a limited amount of goods and services we need to buy and consume in a short time frame. The store of value bucket, on the other hand, has an infinite capacity, as we can always increase the size of our savings. <\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2025\/01\/buckets-01.png\" title=\"\"><\/figure>\n<p>The problem is that fiat money isn\u2019t a very good savings container. Fiat is money with infinite supply, and each new dollar dilutes the purchasing power of all the outstanding dollars. In the 20 months since January 2020, the U.S. dollar <a href=\"https:\/\/fred.stlouisfed.org\/series\/M2SL\" target=\"_blank\" rel=\"noopener\">money supply<\/a> rose by 35% \u2014 that is, by $5.4 trillion \u2014 and this has resulted in exploding prices all across the board: consumer goods, material, houses, financial instruments. Fiat is a very leaky bucket, because anything saved will gradually lose its purchasing power.<\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2025\/01\/image-1.png\" title=\"\"><\/figure>\n<p>With those insights in mind, let\u2019s see how Bitcoin fits in.<\/p>\n<h2>Gresham Meets Nakamoto<\/h2>\n<p>Bitcoiners sometimes invoke Gresham\u2019s law as a reason why Bitcoin will succeed, but the truth is that it\u2019s not applicable in its original form to the present situation.<\/p>\n<p>Gresham\u2019s analysis covers a case of two currencies where the face value of both currencies is set by the government. The best historical example of Gresham\u2019s law in action is the era of bimetallism. Between the years of 1792\u20131873, the face value of gold and silver was fixed \u2014 at first in the ratio of 15 to 1 \u2014 so that 15 ounces of silver were deemed equal to one ounce of gold. But the problem was that the price ratio of gold and silver oscillated around this parity over time, leading to one metal being overvalued and the second being undervalued. The government made several adjustments to this fixed, face-value ratio until it finally relinquished the idea of bimetallism and shifted to a pure gold standard in 1873.<\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2025\/01\/100_image3.png\" title=\"\"><\/figure>\n<p>As Murray Rothbard points out in, \u201c<a href=\"https:\/\/nakamotoinstitute.org\/literature\/what-has-government-done-to-our-money\/\" target=\"_blank\" rel=\"noopener\">What Has Government Done to Our Money<\/a>,\u201d the correct phrasing of Gresham\u2019s law isn\u2019t the popular \u201cbad money drives out good money\u201d but rather \u201cmoney overvalued artificially by government will drive out of circulation artificially undervalued money.\u201d<\/p>\n<p>Clearly this doesn\u2019t apply to the bitcoin-fiat dynamic, as the government doesn\u2019t set the face value of bitcoin. So, in order to apply the insights of Gresham&#8217;s law in the context of bitcoin, we need to dissect Gresham\u2019s insight and come up with a modified version of the original law that takes into account a co-circulation of fiat and non-fiat money.<\/p>\n<p>For that, I believe that we need to further rephrase Rothbard\u2019s interpretation of Gresham\u2019s law. What does it actually mean that one type of money <em>drives out <\/em>the other from circulation? Through the lens of <a href=\"https:\/\/bitcoinmagazine.com\/guides\/what-is-money\">monetary functions<\/a>, it means that one currency takes on the role of being a medium of exchange, and the other a store of value. <\/p>\n<p>So, the dissected version of the original Gresham\u2019s law would then read:<\/p>\n<p><strong>Overvalued money will become the dominant medium of exchange in the economy, while the undervalued money will become the dominant store of value.<\/strong><\/p>\n<p>This is precisely what happened in the bimetallism era, when gold became the preferred medium of exchange instrument, while silver was \u201choarded\u201d as a store of value.<\/p>\n<p>Now to finally apply this insight to bitcoin versus fiat, we have to get rid of the overvalued and undervalued parameters. I believe that these can be replaced by a forward-looking evaluation of the respective monetary policies of fiat and bitcoin. Fiat is a type of money with potentially infinite issuance, while bitcoin is a type of money with a guaranteed, fixed issuance. (For those wondering whether bitcoin\u2019s issuance is really guaranteed, I recommend reading through Parker Lewis\u2019 \u201c<a href=\"https:\/\/unchained.com\/blog\/bitcoin-is-not-backed-by-nothing\/\" target=\"_blank\" rel=\"noopener\">Bitcoin Is Not Backed by Nothing<\/a>,\u201d where he explains the credibility of bitcoin\u2019s monetary policy). <\/p>\n<p>It\u2019s safe to assume that fiat will keep on inflating and thus dilute the purchasing power of all the outstanding units.<\/p>\n<p>It\u2019s also safe to assume that bitcoin will keep true to its monetary policy of fixed issuance, so the purchasing power of the outstanding units will not be diluted in the future.<\/p>\n<p>Now we can restate Gresham\u2019s law to account for the co-circulation of fiat and non-fiat money. <\/p>\n<p>Presenting,<\/p>\n<blockquote>\n<p><strong>Nakamoto-Gresham\u2019s Law<\/strong><\/p>\n<p>Bitcoin drives out fiat as a store of value.<\/p>\n<p>Fiat drives out bitcoin as a medium of exchange.<\/p>\n<\/blockquote>\n<p>In layman\u2019s terms, it\u2019s rational to spend fiat and HODL bitcoin. Fiat loses its value over time, so we naturally look for ways to get rid of it. Bitcoin gains in value over time, so we naturally look for ways to hold on to it.<\/p>\n<p>We will see the strengthening effects of Nakamoto-Gresham\u2019s law as more people realize that (1) fiat will keep on failing in its role as a store of value, and (2) bitcoin will keep on gaining traction for its store of value function, mostly through its increasing credibility of being the world\u2019s only monetary instrument with a predictable monetary policy. <\/p>\n<p>However, there are two conditions to Nakamoto-Gresham\u2019s law:<\/p>\n<p>Condition A: <em>Fiat is usable as a medium of exchange<\/em>. This is not the case in some countries (especially in the case of cross-border payments), so we may see bitcoin also being used as a medium of exchange in such places. El Salvador\u2019s rising usage of the Lightning Network for remittance payments is an apt example of bitcoin being used as a medium of exchange because of fiat\u2019s shortcomings.<\/p>\n<p>Condition B: <em>An individual or company receives fiat earnings<\/em>. Fiat earners will look to get rid of fiat before bitcoin. If the given individual or a company is already fully bitcoinized and handles bitcoin only, then bitcoin naturally becomes a medium of exchange as well. <\/p>\n<h2>Bitcoin Prevents Civilizational Degradation<\/h2>\n<p>Economists, pundits and talking heads of all kinds who criticize bitcoin for not being a widespread medium of exchange are missing the point. In the leaky bucket environment we are in, we don\u2019t need another medium of exchange, especially when fiat still serves this role satisfactorily and most of our wages are still in fiat. It would be quite irrational to spend bitcoin while we still have fiat to spend. HODLing bitcoin is a purely rational act as it provides us with the store of value function that fiat increasingly fails to sustain.<\/p>\n<p>When fiat ceases to satisfy the role of the medium of exchange, or when individuals receive the entirety of their earnings in bitcoin, only then does it make sense to regularly spend bitcoin on daily purchases. <\/p>\n<p>Bitcoin becoming a widespread store of value might prove to be a civilization-saving event. Developed civilizations need a reliable store of value to build and preserve wealth. When we don\u2019t build up savings and instead spend everything we earn (and more, via debt), our infrastructure becomes fragile, societal values become corrupt, and the future becomes highly discounted. We see where this leads to through many historical examples: coin debasements of Ancient Rome led to the empire\u2019s collapse; hyperinflations of the 20th and 21st century led to war, totalitarianism and famine. We can escape this fate, both on the individual and societal level, by embracing Bitcoin.<\/p>\n<p><em>This is a guest post by Josef T\u011btek. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or <\/em>Bitcoin Magazine<em>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>We know the idea of Gresham&#8217;s law \u2014 but it cannot be applied directly to bitcoin without some modification.<\/p>\n","protected":false},"author":2569,"featured_media":9568,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[1607,2591,1831,59,69],"class_list":{"0":"post-11513","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-economics","9":"tag-greshams-law","10":"tag-martys-bent","11":"tag-opinion","12":"tag-store-of-value"},"author_data":{"id":2569,"name":"Josef T\u011btek","nicename":"josef-tetek","avatar_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2025\/01\/josef-96x96.jpg"},"featured_image_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/bitcoin-coin.jpg","_links":{"self":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/11513","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/users\/2569"}],"replies":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/comments?post=11513"}],"version-history":[{"count":0,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/11513\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media\/9568"}],"wp:attachment":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media?parent=11513"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/categories?post=11513"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/tags?post=11513"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}