Why STEEM Is "Bad" Money And Bitcoin is "Good"

In my post yesterday I discussed some of the issues that the STEEM community is facing right now and addressed reasons behind why the price has been stagnating for nearly 7 months. Today I wanted to get more into the economic principles driving STEEM's markets and explore some possibilities for the future. Please join in on the discussion below!

The world around us is governed by laws and theories, many of which we may understand based on common sense principles but don't really think about until they are clearly defined and laid out before us. One of these such laws is known as Gresham's Law, in honor of Sir Thomas Gresham, and the theory states "Bad money drives out good money" in an economy. But what does it mean by "bad" or "good" and how can money be either of those things?

It's not like STEEM is out there committing bank robberies or that Bitcoin is helping little old ladies cross busy intersections. That is just silly. When we refer to the quality of money we are talking about the face value versus the material values, or in this case the free market value of tokens. Good money refers to an asset being undervalued, typically a result of under-supply, whereas bad money would be overvalued and over-supplied. Are you following along?

Great! Now morals aside we are talking about economics here not personal feelings. I love STEEM and think it is fantastic, however the market understands logic and this creates a clear economic incentive to spend STEEM and hoard Bitcoin. Gresham's Law dictates that more valuable commodities and assets will leave circulation as a result of people trading (or spending) the bad money and keeping (and hoarding) the good. STEEM also has inflation whereas every Bitcoiner knows that BTC was designed to be deflationary which only further complicates the issue!

One fantastic example of this economic theory in the real world is US currency. Legal tender laws say that all coins with the same face value must be accepted as equal payment which only makes sense... but not all coins were created equal. Older coins used to be made with a higher percentage of valuable metals such as silver or using more copper. Now the mint produces new coins with zero silver content and primarily uses a copper-nickel combo for all "silver coins" and zinc coated with a thin layer of copper for pennies. Naturally people started to collect and remove these more valuable silver and copper coins from circulation so now it is becoming harder and harder to find these. Probably one of the reasons why many people do not know this about our currency.

In this example the bad money, or the newly minted coins made from cheaper materials, drives out the good money, or the more valuable precious metal based coins. The same thing is happening with the alt-coin markets versus Bitcoin markets. As we all know just about anyone can create an alt-coin therefore the supply of them is never ending, unlike BTC which is extremely scarce and actually takes a vast amount of energy to create now. This creates the incentive for people to sell or trade their alt-coins for BTC and in order to hand over that bad money and keep the good. The sentiments that create the value of these alt-coins are largely dependent on market exposure, community adoption and project development not to mention hype cycles.

What is causing the struggling alt-coin market to stay suppressed even in the wake of the BTC bull run? In my opinion the market still hasn't quite recovered psychologically from the last bear market because a lot of people got burned. Newer crypto investors often times do not know the difference between good or bad projects until it is too late. This then causes buyers to fear making the same mistakes again which can prevent new investment into other cryptos, leading to an overall drop in demand and ultimately market collapse as we saw. Many of these alts will never recover and just fade away while Bitcoin continues to soak up all of the profits.

STEEM unfortunately has been lumped into this alt-coin category and cast aside. It has been slowly dropping in market cap ranking which has also been a psychological blow to the community along with the sinking price. I discussed why pairing STEEM directly against BTC on major exchanges was a fatal error, rather than pairing it against USD which it would have a much better chance outperforming. It is going to take much stronger actions from the community to get the attention from the market that we think we deserve. This means people actually going out and being market participants by using and trading STEEM, also supporting new developers who are utilizing the STEEM token in their dApps.

One thing is for sure- STEEM is here to stay but let's make sure it doesn't fade away into the background!

*Never invest more than you are willing to lose and always do your own research before making any investment decisions. I am NOT a financial advisor and this is NOT financial advice- this material is intended for entertainment and informational purposes only. Hit "CTRL + or CTRL -" to change size of chart.
(All pictures are free domain images created by myself with the help of Coinmarketcap.com)