When Gresham Met Thier - #107
tl;dr - If you're on the fence about using your Bitcoin because "muh Gresham's Law," I'd like to introduce you to "Thiers' Law."
Dear Reader,
A few months ago, prior to the Celsius blow up, I was attending a Bitcoin meetup. It wasn’t my first one, in fact, I’ve been going to a few around town trying to find a place that I felt was to my liking.
The venue was pretty nice, brick walls, string and recessed lights set the mood, and in the middle of it all was a long banquet table where all the members of the meetup were gathered together round food and drink. It was quite the turn around for a bear market, but this was also prior to the big sell offs.
As the night started, we got into the topic about the Lightning Network and how its really come a long way in helping to make Bitcoin a viable means of payment for every things like the infamous coffee. At the far end of the table, a gentlemen, who happened to be affiliated with Celsius, heckled that no one in their right mind should ever use their coins because Number Go Up (NGU).
His position was that no one should ever hold their own keys. People should be staking their Bitcoin to earn yield. Despite hearing about the Lightning Network, Bitcoin was too slow to use as a means of payment. For him, Bitcoin is digital gold, the soundest money in existence, and makes for the best store of value anyone has ever seen.
“Who’s stupid enough to use their Bitcoins,” he asked.
Sitting at the far end of the table, I raised my hand defiantly.
I don’t try to boast or gloat, but I figured, we’re at a Bitcoin meetup… So why not say my piece.
Being tactful, I stated that he wasn’t entirely wrong.
Yes, statistically, Bitcoin has out performed all other assets, and yes in some cases, on-chain transactions can be a little slow, ergo the Lightning Network. As for a person not retaining their private keys, that they need to seek yield, that NGU now and forever… “that sounds more pro-fiat than it does pro-Bitcoin.”
Is there anything wrong with saving (hodlin)? Absolutely not.
I’ve stated clearly the need for savings, and that you can both save and spend in Bitcoin, too.
But is that the only reason anyone gets into Bitcoin, that its only purpose is to be held?
His position isn’t unique.
In fact, it’s very common place in many Bitcoin communities (that I’m aware of) and at some point it almost sounds like it’s a mantra for the unwavering speculator’s belief.
It’s not long before someone in the community, whether in cyberspace or meatspace, recites the old chestnut of “Gresham’s Law” as their argument for never wanting to use their Bitcoin.
Gresham’s Law
If you haven’t heard of Gresham’s Law before, it’s the economic principle that “Bad money drives out good.”
It’s a motto that a lot of sound money “advocates” like to preach about while swiping their credit cards at the checkout.
Gresham’s Law is not wrong, but it is conditional
And the conditions under which Gresham’s Law works is via legal tender law.
“When all currency units are legally mandated to be recognized at the same face value,” Gresham’s law operates in full force. 1
The clearest example I can think of is US coinage
A dollar is a unit of measure.
In terms of silver, coins minted pre-1964 were made of 90% silver and 10% copper for durability. So a full dollar coin was nearly an ounce of silver, and you go down the line of weight between a half, quarter and tenth of an ounce of silver.
After 1964, the debasement of the coins essentially left the US with little more than pot metal as currency. Due to legal tender laws, both good and bad currency units were made equal in value to each other, and the public was required to accept them as payments.
You’re faced with two options now, the pre-1964 and the post-1964 coins, which do you use?
This is the go to response
Many sound money promoters often use the Gresham’s Law argument to prevent themselves and others from using their Bitcoin because they’re under the belief that while there’s still bad currency, that is what should be used first without ever knowing, or pretending not to know, that there is another side to this Gresham coin.
Thiers’ Law
Is the economic principle which complements, or runs opposite of, Grehsam’s which can be understood as “Good money drives out bad.”2
The conditions for Thiers’ Law to operate
Are the lack of, or adherence to, legal tender laws or extreme currency debasement where no one is willing to accept payment of said currency anymore.
You can look at the examples of the Weimar3 and Zimbabwean4 Hyperinflation scenarios, or you can look at the cost of goods today measured in fiat currency since 1971. (Check out https://wtfhappenedin1971.com)
Or, simply look at the fiat price of Bitcoin as it is today versus were it was in 2011.
Source: https://www.pricedinbitcoin21.com/chart/fiat/USD
In the presence of Thiers’ Law, because one financial asset’s purchasing power is greater than the other, you’d want to use the stronger of the two because it provides you more buying power.
Because we’re in extreme currency debasement, and I would argue that we’re actually in a long drawn out hyperinflationary period, due to the lack of legal tender law, using Bitcoin as your currency should be seen as common sense.
But common sense isn’t all that common.
We lose with Legal Tender Laws
Interestingly enough, when chatting with fellow Bitcoiners, nocoiners and newcoiners; the idea of passing legislation to make Bitcoin legal tender (in the US mind you) often pops up. This proves three things to me…
Most of what they know comes from the echo chambers
The understanding of sound money is theoretical or surface level at best
They do not fully comprehend the unintended consequences of what making something legal (or illegal) would entail.
The issue with making Bitcoin legal tender is that it would require that…
Politicians have a thorough knowledge of sound money economics…
and are honest enough to adhere to the laws they’re enacting.
Lobbying groups to write the legislative proposals in a truthful and altruistic manner thinking beyond their own interests.
Possibly making their drafts of legislation open to the public for assessment and audit.
The public to hold the politicians accountable to the by-laws being written by means of attending public hearings, writing, calling, emailing or faxing their representatives and voting.
Set a fixed exchange rate between Bitcoin and whatever other currency is going to be established.
The first two points are most likely never to happen. The third point requires a well educated and responsible public which we are a long ways from. The last point, setting the fix exchange price is most certain what would bring about Gresham’s Law to Bitcoin.
Imagine, if you will, that the US government has finally decided to make Bitcoin legal tender and has set the exchange rate at a fixed (at the time of writing) 19,642 USD to 1 BTC. What would it mean?
It would make every 1 USD worth 5,090 sats permanently, thus removing the volatility from the USD/BTC exchange rate and giving what the legal tender advocates want, a stable currency and potentially having Bitcoin usage made tax free.
But what happens at this point?
Now you have a fixed and legally recognized 1 to 5,090 ratio between fiat and Bitcoin.
You’ll have potentially reintroduced Gresham’s Law into the equation, meaning that people will continue to use their fiat currency over their cryptocurrency, or they might use another cryptocurrency all together which isn’t tied to a legal tender law at all.
If the value of 5,090 sats is equal to the purchasing power of 1 USD, and you know that the US will continue to inflate the currency supply into infinity, why would you ever use your Bitcoin?
More likely than not, you’ll opt to use your fiat and keep your Bitcoin. And eventually, more Bitcoin will go into hiding in cold storage condemning itself to the same fate as gold and silver… or worse… prolonging fiat’s reign of dominance as a currency.
What people are really looking for is better tax treatment for Bitcoin
And I can understand and would be on board for something of that nature. However, who’s to say that the tax treatment of Bitcoin will be better off in the future?
What if the tax treatment for Bitcoin and other financial assets actually gets worse?
It wasn’t too long ago that the present ruling party was suggesting increasing the tax rate for financial assets5… What if within the next 10 to 20 years, the tax treatment of long term assets raises to a significantly concerning percentage that it ultimately kills the idea of ever using Bitcoin as a currency?
What if the current tax treatment is as good as it’s going to get?
And, is the only reason preventing them from using their coin is because of a little tax burden?
I recommend people take the time to read “Uses and Abuses of Gresham’s Law in the History of Money” by Robert Mundell.
The night continues…
And so does the argument. People’s heads bounce back and forth has if watching a tennis match, with each point and counter point being made for and against Bitcoin usage.
“Not your keys, not your coins,” where my closing statements, as far as I can remember them. The main point for Bitcoin is to have money that is yours, that you own and that you are the rightful owner of. That we had our first experience, in the first world, of government imposing very authoritarian actions against its citizens for expressing a different opinion from the ruling party.
That yes, as a store of value, Bitcoin does well, but also if we don’t use it will lose it and there’s no certainty or guarantee that what we have before us will be there in 10 or 20 years. I’m not a speculator, I can’t see the future, but I’m trying to create the kind of life I want to live in the future now.
The night concludes. There’s no “winner” in it all, just a healthy intense sharing of ideas between Bitcoin enthusiasts.
Conclusion
Ultimately, I’m for living on a Bitcoin standard. I’d love for more people to earn it, save it and spend it and to create a more sovereign life.
Its not for everyone, and not everyone is ready for it, and I get that… However, I feel that as of late, the current culture has shifted from subculture fringe to an financial rapture cringe where they wait in the wings for some kind of 2008 or 2020 collapse…
As if they’re just hoping for some kind of disaster movie style event to happen just so they can have the pleasure of saying “I told you so.”
Then there are those who are hodlin for the “someday, one day,” of hyperbitcoinization when in fact that day is already here. All they need to do is look.
If you’re on the fence, leaning towards the “I want to use my coin, but I’m not sure,” then I hope what I’ve shared with you today help you see that there’s another side to the (bit)coin.
Until next time…
https://www.investopedia.com/terms/g/greshams-law.asp
https://en.wikipedia.org/wiki/Gresham%27s_law#Reverse_of_Gresham's_law_(Thiers'_law)
https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic
https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
https://news.yahoo.com/biden-proposes-tax-increases-wealthy-090059424.html