Markets exist in many different forms and sizes. From the street bazaars to the offices of Wall Street, a unique phenomenon exists of bad value driving out good value. In these situations, people tend to hoard the good money and spend the bad. “HODLing” Bitcoin and spending fiat is a prime example of this phenomenon called Gresham’s Law. So what does this mean for the future of both fiat and crypto? With crypto interest on the rise, and the value of many national currencies declining, we very well may be witnessing Gresham’s Law in effect in real time.
Looking at the crypto market over the past year, one will notice that altcoins have shown double digit reds more often than Bitcoin. People are fearfully selling their declining altcoins and holding onto Bitcoin, a cryptocurrency they trust. As crypto interest grows and the market increases, all coins benefit. Yet, when the market shrinks, altcoins take the biggest hit compared to Bitcoin. What we’re seeing in the current market situation is people funneling bad money (dollars/altcoins) into good money (Bitcoin). This is full scale Gresham’s Law in effect.
Good money does not circulate in the same manner as bad money does because people do not want to spend their valuable Bitcoin. People who see the true value of Bitcoin (HODLers) will never sell unless it’s an absolute necessity. Dr. John C. Edumnds, National Economist and Financial Reformist states that:
“Bitcoin might bring back Gresham’s Law by driving out inferior or “bad” money. Central banks fight deflation by putting more fiat money into circulation. Consumers and businesses then spend it and raise the demand for goods and services.”
The process Dr. Edmunds describes here causes inflation and has not worked in the past decade since people opt to hold their money instead of spending it. Alternatively, we are seeing a trend of people saving money in the form of digital assets and spending the less valuable, and less trustworthy fiat currency in daily life.
To see a real life example of hyper-inflation and Gresham's Law, we need only to look at Venezuela’s Bolivar over the past two years. Examine the chart below.
What was once a valuable and stable currency trading at 10/Bolivar to the US dollar quickly lost 90% of it’s value in just two years. While this is just an extreme example, it shows just how frail fiat money can be, even though it’s advertised as the safe and stable option. If Venezuelans converted their bolivars to Bitcoin in 2015/2016, they would have preserved the full purchasing power of their money instead of residing in economic turmoil like today.
However, while Bitcoin might be a good place to store value, when will it become “real money”?
As Gresham’s Law continues its effect and bad money drives out the good, we will continue to exist in a market conditioned to HODL. More merchants are starting to accept Bitcoin as a payment issue yet people are still not spending it. After all, why would one spend something that keeps increasing in value? This leads some economists to believe that Bitcoin will never fully replace fiat as a spending tool but will forever remain as a trusted store of value. This philosophy is essentially the reason YouHodlers started in the first place.
YouHodler saw the current state of the HODLers market and wanted to offer services to people that give them the purchasing power of their crypto assets without having to sell them. Through the process of crypto loans and the power to borrow crypto and fiat, users can get money for their assets for hedging, multiplying crypto or just to use in their daily lives.
In many ways, crypto loans are the best of both worlds as people no longer have to worry about giving up their valuable assets and missing out on bull runs. They can keep HODLing while Gresham’s Law is in effect and simultaneously benefit from the value of their crypto.
It may be too early to tell just how far crypto interest will go but until then, visit ust at YouHodler.com and explore our crypto loans, crypto conversions, crypto savings account and more great tools to help you use the value of your assets and profit.