The economic principle that explains why you hold crypto but spend fiat money

How a 16th-century concept still governs our financial decisions in 2024

When you have Bitcoin in your wallet and dollars in your checking account, which do you spend first? Most would answer: fiat money. Behind this behavior lies a fascinating economic mechanism that has shaped monetary systems for centuries: Gresham’s law, a principle experiencing a notable resurgence in the era of cryptocurrencies.

The concept that predicts your financial behavior

Gresham’s law states that when two forms of money circulate simultaneously, individuals tend to get rid of the perceived less valuable one while accumulating the one they consider superior. The popular maxim sums it up perfectly: “Bad money drives out good.”

What distinguishes “good” money from “bad”? It’s not a moral question but a perception of value. Good money maintains purchasing power and is preserved; bad money constantly loses value, and people seek to dispose of it as quickly as possible. Although the concept circulated in medieval times, Sir Thomas Gresham, a 16th-century Elizabethan financier and advisor to Queen Elizabeth I, popularized this observation by analyzing real monetary systems, giving the law its name.

For centuries, this principle manifested in traditional fiat currency economies. When governments debased their coins or counterfeiting was prevalent, authentic coins disappeared from circulation because users preferred to retain them. Conversely, lower-value money flooded the markets.

Cryptocurrencies: a new scenario for an old principle

The entry of Bitcoin, Ethereum, and thousands of digital projects has revitalized this economic theory in unexpected ways. In the crypto ecosystem, Gresham’s law operates, but with nuances different from traditional markets.

Highly volatile digital currencies are usually reserved for speculative operations and long-term capital movements, while more stable assets are used for everyday transactions. This pattern precisely reflects Gresham’s principle: people choose to spend what they perceive as less valuable (in terms of appreciation potential) and hoard what they consider precious.

Bitcoin exemplifies this behavior paradigmatically. Treated as a digital store of value akin to gold, users prefer to hold it, expecting future revaluation. Rarely does someone spend 1 BTC in an ordinary transaction. Conversely, stablecoins—crypto assets pegged to fiat currencies or commodities—are predominantly used in daily payments and international transfers because they maintain a predictable value.

Stablecoins occupy a special place in this dynamic. USDT, USDC, and similar act as the contemporary equivalent of “good money”: reliable, predictable, ideal for transactions. Their growing adoption in traditional financial platforms and crypto markets reinforces their central role in value circulation.

The silent battle between crypto and conventional money

How does Gresham’s law unfold in the competition between cryptocurrencies and legal monetary systems? Multiple forces converge here.

First, perceptions of stability. A person with US dollars and Bitcoin faces a clear dilemma: spend dollars today (sure that inflation will erode their purchasing power tomorrow) and save Bitcoin (trusting in its future appreciation). The decision is inevitable: dollars are spent, Bitcoin is hoarded.

However, the extreme volatility of many crypto assets creates a paradox. If Bitcoin could lose 20% of its value in a week, why would anyone spend it? Here, the line between good and bad money blurs. Many users avoid spending volatile cryptocurrencies not because they consider them superior, but because the risk is prohibitive.

Regulatory dimensions add complexity. In jurisdictions where fiat money enjoys full legal recognition and cryptocurrencies face restrictions—such as China’s ban in 2021—Gresham’s law is enforced through mandates: citizens are compelled to use the yuan, not by economic preference but by legal obligation. Fiat money becomes “bad” forced money.

Institutionalization also redefines the game. Companies accept conventional money for transactions because it is universally recognized as legal tender. Despite growth, cryptocurrencies remain in a regulatory limbo that discourages widespread transactional use.

Where Gresham’s law breaks down

Despite its elegant theory, Gresham’s law faces critical limitations in the modern world and especially in crypto contexts.

Unpredictable volatility: Exchange rates fluctuate. In a floating currency market—where Bitcoin jumps from $30,000 to $60,000 in months—the concept of a stable “intrinsic value” underlying Gresham dissolves. Is Bitcoin good or bad money if its value is radically uncertain?

State intervention: Governments can artificially keep low-quality money in circulation through exchange controls, restrictive monetary regulations, or legal imposition. It’s not a free market process; it’s coercion.

Psychological and cultural factors: People do not always act as perfect economic machines. Generational trust in fiat money, familiarity with traditional systems, and distrust of the new can contradict purely mathematical predictions. Many avoid crypto not because they understand Gresham’s law but out of fear of the unknown.

Fintech innovation: Modern payment systems—digital wallets, instant transfers, decentralized finance—have fragmented the simple dichotomy of “good vs bad money.” Multiple layers of value, utility, and liquidity now coexist, complicating any simplistic analysis.

The speculative paradox: Contrary to Gresham, people often accumulate volatile assets precisely because they expect their value to rise. It’s accumulation for investment reasons, not monetary quality. Storing cryptocurrencies may be irrational according to theory, but it persists nonetheless.

Gresham’s legacy in the digital age

Gresham’s law remains a powerful interpretive lens for understanding contemporary monetary decisions, though it requires sophistication to apply correctly. In cryptocurrencies, the principle partially explains why Bitcoin is hoarded, why stablecoins dominate transactions, and why fiat money persists in daily payments.

However, current reality is more nuanced than the original formulation. The law still operates but interacts with volatility, regulation, collective psychology, and technology in ways Gresham could not have anticipated. Recognizing its relevance and limits is essential to understanding its ongoing influence.