Let's go back to the year 1964 in the US and imagine that you have silver quarter dollar coins that contain 90% silver and are worth $0.25 US dollar each (by law).
On year later, in 1965 the US government enacts The Coinage Act of 1965 which reduces the silver content of all new minted quarters from 90% to 40%, but the coin would still be worth $0.25 (by law).
What will happen? (Or actually what happened back then?)
People begin to hoard their old quarter dollar coins and only spend the new quarters. After all, they are both equally good for paying someone $0.25 US dollar.
Gresham's law
This is Gresham's law. A monetary principle stating that "bad money drives out good."
When Queen Elizabeth I became the Queen of England in 1558, she soon received a letter from Thomas Gresham. Gresham was an English banker and one of England's richest citizens and he pointed out to his queen the importance of sound money. Henry VIII had replaced 40% of the silver content of the British shilling with worthless metal, whereby this bad money pushed the good money out of circulation.
The same happened with the quarter dollar coins in the US in 1965. People began to hoard the silver coins.
Fiat money today
Where one used to create "bad money" by reducing the content of precious metals, this can be done a lot easier today. Since precious metals are no longer used in our coins and money is no longer linked to the price of precious metals at all, you can erode the value of the money by simply printing more of it. And that's exactly what central banks all over the world have been doing for multiple years now. They reduced interest levels to below zero whereby money became free for banks to lend. If something is free, it has no value right?
Bitcoin
When you notice people hoarding a particular currency, Gresham's law may well apply.
If more and more people begin saving in Bitcoin instead of dollars and dollars are only used to just spend, the velocity of fiat money begins to accelerate to a point where the fiat currency begins to hyper inflate. If the dollar has no demand other than to spend it straight away then it has no value. If fiat money is no longer used as a store of value it is no longer sound money.
When the majority of a countries population prefer to save their value in Bitcoin or another currency instead of the local currency then that currency collapses. In countries such as Venezuela and Zimbabwe, Greshams law is already happening. Their fiat money is so worthless that no one wants to accept them. Therefore the only way to buy food in Zimbabwe is to use the US dollar. People began pricing in US Dollars instead of Zimbabwean dollars.
There may well come a time when it makes more sense to price in Bitcoin rather than US dollars in the future.
When the illusion of fiat money is exposed for what it is, the value of bitcoin compared to fiat will continue to go higher, and higher. The high levels of debts of the financial crisis of 2008 were never addressed, which has made the entire financial economy today into one huge hazard. This empire of paper money will topple soon. That's when Bitcoin will realy take off, but pricing BTC in US dollars will then be irrelevant.
Just HODL!
Sources used:
- https://en.wikipedia.org/wiki/Coinage_Act_of_1965
- https://en.wikipedia.org/wiki/Gresham%27s_law
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