Tuesday, 5 December 2023

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What is Gresham’s law, and how does it relate to cryptocurrencies?

What is Gresham’s law, and how does it relate to cryptocurrencies?

Gresham’s law, explained

Gresham’s law has historically influenced the circulation of currency and continues to impact economic behavior by addressing how individuals prioritize different forms of money.

Gresham’s law is a principle in economics that states that when two different forms of money are in circulation, individuals typically spend or trade the money they believe to be more valuable while hoarding or using the money they believe to be less valuable. 

A common way to summarize this is “bad money drives out good.” Here, “good money” is defined as a currency that has greater intrinsic worth and is held onto, whereas “bad money” is defined as a currency that has a lower intrinsic value and people are eager to get rid of. 

Although he didn’t originate the concept, Gresham’s law is named after Sir Thomas Gresham due to his role in popularizing the idea of how bad money drives out good money in monetary systems. He was a 16th-century English financier and adviser to Queen Elizabeth I.

Gresham’s law has historically been seen in a number of fiat currency systems, where debased or counterfeit coins would drive out of circulation the more valuable, legal coins because individuals would rather hold onto the higher-value currency and spend the lower-value currency. This idea is still relevant today when debating the use of cryptocurrencies and their differing levels of stability and utility.

How Gresham’s law applies to cryptocurrencies

When it comes to using cryptocurrencies, Gresham’s law holds that more volatile digital currencies are utilized for speculative investments and stable and well-established digital currencies are chosen for everyday transactions, reflecting the principle of “bad money” and “good money.” 

When it comes to choosing which cryptocurrency to use for transactions, individuals often opt for the one they consider less valuable due to its stability and store of value. Gresham’s law implies that individuals tend to utilize cryptocurrencies that are less volatile and well-established for everyday transactions, saving the more speculative and volatile ones for investments or assets. The principle remains relevant in cryptocurrency adoption and usage patterns.

Gresham’s law and cryptocurrency’s function as a store of value are closely related. Some digital…

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