Gresham's Law is an economic law that states: “Worse money crowds out better money,” or “Money on which you don’t have to pay taxes crowds out money on which you need to pay taxes.”
Discussions regarding Bitcoin and Gresham's Law immediately turn into a discussion about the historical formulation of this law. Speaking of economic exchange, this law states that if the seller accepts two different types of payment, the buyer will pay the one that he considers to be of lower value. When this phenomenon occurs in enough economic exchanges, it results in the “worse” currency pushing the “better” currency out of circulation. Buyers pay a less valuable medium of exchange (in their opinion) if the seller accepts different payment methods.
This phenomenon, which we might call the Gresham effect, does not depend on any legal framework. If the seller accepts expired milk and fresh milk as a means of payment, we would pay with the expired milk. If there are many such exchanges in the market, this will lead to the fact that “bad” milk will crowd out “good” milk.
So if sellers in a market accept both Bitcoin and fiat, Gresham's Law tells us that buyers will pay with the medium of exchange that is less valuable to them. If market participants believe that fiat currencies are worth less than Bitcoin, this could lead to the “worse” money (fiat) driving out the “better” money (Bitcoin).
Since Bitcoin has not yet been widely circulated, the Gresham effect in our case works as a disincentive barrier to greater use of digital currency. This situation will continue as long as merchants accept both fiat and bitcoin as payment methods. In short, due to the Gresham effect, Bitcoin will not become a common medium of exchange until conditions change.
Author's interpretation: This is an indicator/impliment that Bitcoin is best suited as a reserve currency or store of value, not as a currency for daily transactions. In general, I don't want to spend Bitcoin on a chocolate bar or a T-shirt if the seller accepts both Bitcoin and fiat. I'd rather pay cash for this.
On the other hand, I can spend Bitcoin if I want to buy something and I don't have enough traditional currency.. For example, I want to buy a house, but I only have enough fiat currency for 20% of the cost. In this case, I can use the reserve currency to pay the remaining 80%. The example does not imply that using fiat to pay the entire cost is a bad option. If I had enough fiat for my entire house, I would pay in fiat currency.
The significance of the article is that those who predict a future for Bitcoin as a widespread medium of exchange may be wrong simply because it is contrary to the laws of economics. Both economic laws and empirical evidence indicate that Bitcoin's limited supply is deterring market participants from using it as a means of payment.
According to https://www.zerohedge.com
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