“Gresham’s Law” has been around a long time. It was coined in 1860 by Henry Dunning Macleod, a Scottish economist. But Macleod named Gresham’s Law after Sir Thomas Gresham, a 16th century English financier.
Nicolaus Copernicus, the Renaissance-era astronomer who proposed that the Earth revolves around the sun, rather than vice versa, also described a version of Gresham’s Law in a treatise written in 1519, the year Sir Thomas Gresham was born. For this reason, it is sometimes referred to as “the Gresham-Copernicus Law.”
And yet the observation behind Gresham’s Law is older still, because humans have been coining money, and intentionally degrading the value of money, for thousands of years. One of the earliest known references to the idea came from Aristophanes, the Greek playwright, in the 5th century B.C.
Simply stated, Gresham’s Law holds that “bad money drives out good.”
This originally meant that, if there were two forms of commodity money in circulation, one good and the other bad, the good money would be saved and the bad money spent.
Put another way, currency users showed a tendency to hoard the “good” metal coins, adding them to a savings stockpile, while spending the “bad” coins to be rid of them as fast as possible.
Over time, this resulted in the good coins disappearing from circulation.
In the days of commodity money, “good” and “bad” described the amount of metal content in the coins. “Good” coins had the metal content they were supposed to, whereas bad coins were clipped or degraded or faked as a matter of government policy.
For example, Henry VIII, king of England in the mid-16th century, embraced “The Great Debasement” as official policy to help fund enormous spending programs. In May 1542, Henry gave secret orders to reduce the total amount of gold and silver in English coins.
On Henry’s watch, the amount of silver in an English silver coin gradually fell from 92.5% down to 33%. Many of the “silver” coins used were eventually made of copper, with a thin layer of silver coating.
As the silver rubbed off, the portrait of Henry VIII on the face of the coins would start to look reddish as the copper showed through. It was joked that Henry’s portrait was “blushing” at how low-quality the coins were; the king was also nicknamed “Old Coppernose.”
Given that state of affairs, anyone who had the old silver coins at 92.5% grade would generally try to keep them, whereas Henry’s lousy coins would be quickly exchanged for something else.
Today’s money is mostly electronic, with very little in the form of metal coinage. But human nature is exactly the same, so Gresham’s Law still applies.
A unit of fiat currency, like a dollar or a euro, does not have a fixed amount of metal content that is subject to debasement. But fiat currency units can be debased just the same, by issuing more of them and expanding the supply.
We can also distinguish between good money and bad money, in the same manner 16th-century savers distinguished between good coins and bad, by considering which form of money is more likely to hold its value.
In a time of printing and excessive spending, with weak economic growth and mounting debts as far as the eye can see, this puts government money in the “bad” category, because it isn’t hard to see an increased pace of debasement ahead.
Bitcoin, on the other hand, is the ultimate example of “good” money because it cannot be debased at all. There is a fixed amount of Bitcoin supply available; the rate of new Bitcoin supply is mathematically programmed to diminish over time; and eventually the rate of new supply will hit zero.
Then, too, Gresham’s Law stipulates that “good” money will be saved, rather than spent. That is exactly what we see with Bitcoin. Forensic studies of transaction activity show the majority of Bitcoin investment is held, rather than traded or spent back into circulation. Investors tend to buy Bitcoin to hold it, forever, as a permanent store of value.
The tendency to buy Bitcoin and hold it, rather than trade it or spend it, has a further kind of ratchet effect by reducing the amount of Bitcoin in circulation.
If, say, a million dollars’ worth of Bitcoin goes into a cold storage wallet and does not come out again, ever, the impact on the day-to-day supply and demand balance is the same as reducing the Bitcoin supply by a million dollars permanently.
Even better still, the more that investors realize what other investors are doing — buying Bitcoin to hold it, and to escape the “bad” money that is fiat currency — the more that the tendency to hold Bitcoin for the long-term, rather than spend it or trade it, will increase.
The resulting feedback loop is elegant and powerful: The more that fiat currencies are debased, the more that Bitcoin (which is mathematically impossible to debase) is purchased as a long-term store of value. The more that the Bitcoin price rises, given its role as a long-term store of value, the more the tendency to hold Bitcoin, rather than spend or trade it, increases.
This reduces the day-to-day Bitcoin supply yet further, which causes the price to rise even faster via greater supply-demand imbalance, which reinforces the whole feedback loop.
If you want to better understand why Bitcoin is so powerful as a store of value, by the way, you can revisit our thoughts on why Bitcoin is the purest form of hard money ever created.
Can the beneficial feedback loop created by Gresham’s Law last forever? No, nothing goes up in price forever — if it did, the final price would be “infinity.”
Instead, it appears likely Bitcoin’s price will rise along with growing awareness of the Bitcoin digital use case, until such time that the world’s savers have their fill of Bitcoin. That trend of awareness has only just begun and could take years to fully play out.
By the end, Bitcoin could become not only a universal savings vehicle for hundreds of millions of consumers, but also a reserve asset for corporations and central banks.
To fulfill this level of widespread demand, the Bitcoin price would likely have to settle out somewhere between $100,000 and $1 million per coin.
From that point onward, price fluctuations would likely be tiny, as the vast majority of the fixed Bitcoin supply would be permanently stockpiled. But it’s still a long way from here to there.
Someday, the memory of Bitcoin trading below $10,000 per coin could feel as quaint as the thought of gold trading below $100 per ounce in the early 1970s.
And if all of this sounds wild or far-fetched to you, just be aware the process has already started.
Just consider the actions of MicroStrategy Inc., a publicly traded business intelligence firm with a $1.3 billion market cap (symbol MSTR on the Nasdaq).
Michael Saylor, the CEO of MicroStrategy, recently announced that MSTR would be putting the entirety of its $250 million inflation-hedging budget into Bitcoin.
“This investment reflects our belief that Bitcoin, as the world’s most widely adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash,” Saylor said.
MicroStrategy thus joins multi-billionaire Paul Tudor Jones, one of the world’s most prominent hedge fund managers, in publicly endorsing Bitcoin as a long-term inflation hedge.
Strategic actions to safeguard against currency debasement — a form of monetary inflation born of increasing the money supply — are Gresham’s Law in action. The primary beneficiary of Gresham’s Law, both today and in the years to come, will be Bitcoin.
Gold and silver will benefit greatly too, of course. But with respect to sheer magnitude of price appreciation on its journey to global awareness, and even its possible adoption as a central bank reserve asset, Bitcoin could leave everything else in the dust.