After I posted the article about how Gresham’s Law spells the death of bitcoin, the reddit community was up in arms. The most articulate argument came from DanielJamesSanchez, which I quote in full:
It seems you’re slipping in between two different definitions of the words “good” and “bad”. At one point you correctly define “good” in the context of the logic of Gresham’s Law as “mandatorily overpriced”, and thereby implicitly “bad” as “mandatorily underpriced.” But then you slip into using “good” as if it were defined as “superior in its money-ish qualities” and “bad” as if it were defined as “inferior in its money-ish qualities.”
But according to the latter definition, a sort of reverse-Gresham’s Law would be true: good money would tend to drive out the bad, as Menger explains in his essay on the origin of money. Legal tender laws favoring the “bad” money may mitigate or overwhelm this, but it wouldn’t invert the phenomenon, turning “goodness” into a liability.
For example, say cattle was favored by legal tender laws. According to your theory, silver’s superior money-ish qualities would be a liability in such a situation, and that it would fare worse as money, even than say jade. People would be less likely to spend silver than to spend jade, because it’s fantastic money-ish qualities are too great to ever want to let silver go, while jade, with its middling money-ish qualities would not be reserved so jealously. Obviously, that doesn’t make any sense.
To the extent that silver (or bitcoins) have money-ish qualities, they are more likely to be able to overcome the disadvantages of legal tender laws favoring another currency. To the extent they have more money-ish qualities, they will tend to be more liquid. To the extend they are more liquid, vendors will be more eager to accumulate them in cash balances. And to the extent that is true, vendors will be more willing to offer silver/bitcoin prices attractive enough to make the buyer willing to spend silver/bitcoin instead of the legal tender money.
Devil’s Advocate: Ha, did you fall on your face this time, Dave! What a clunker of a mistake you made.
Smiling Dave: Allow me to reply.
DA: Sure, what can you possibly say?
All you are saying is true, with one exception. I refer to the money-ish quality of “destined by God to constantly go up in market price until all men use it as currency”.
We can split the world up into two groups. One group thinks there is a reasonable chance bitcoin will drop like a stone some day, maybe someday soon. These people will obviously avoid bitcoin.
So anyone who has a bitcoin must be a member of the other group, that thinks there is no such likelihood. Thus, they think it will go up, as it has since its inception. Yes, there may be bumps in the road here and there, but the clear trend is for it to go up. God wants it to, and it will. [Plus, the way bitcoin is set up, of course it will rise all the time. See my humble article.]
Not only that, but once bitcoin has this single all important money-ish value of destined to go up in purchasing power always [in the minds of these people], all the other money-ish values are suddenly transformed [in their minds] from reasons to use the bitcoin into reasons to not use the bitcoin.
Because the very nature of bitcoin is now helping God along. Bitcoin will continue to have a greater and greater demand, because of all its superior money-ish qualities. That means all the suckers out there, who are not as smart as me and don’t know God wants it go up forever, will start using bitcoins sooner than if it didn’t have all these superior moneyish qualities. Greater demand means greater purchasing power.
Since I know bitcoins will go up really high, it’s obviously worth it for me to soldier on with dollars in my day to day spending, and save the bitcoins for when I must use them. Why give away the goose that lays golden eggs?
And sure enough, that is exactly what is happening in the bitcoin market today. 97% of all bitcoins are hoarded. [Source: http://www.fool.com/investing/general/2013/04/05/why-bitcoin-is-doomed-to-fail.aspx]