Everyone has heard that "bad money drives out good," but not many know its origin. Theoretically, the superior should prevail over the inferior. So how does bad money win?

The story goes that ancient coins were minted from precious metals like gold and silver. However, their quality and purity varied. Everyone wanted to hold onto the better quality, higher purity coins and would spend the inferior ones first when making purchases. As a result, the circulation of bad money far exceeded that of good money, leading to the phenomenon where bad money "drives out" good.

Bad Money Drives Out Good

Though we haven't traveled back to ancient times, the story above gives a strong sense of déjà vu, as if I've heard it before. Exactly. When we hold both Bitcoin and US dollars, everyone knows it's better to use dollars to buy pizza. Otherwise, if Bitcoin appreciates significantly in the future, you become the protagonist of Bitcoin Pizza Day. The underlying logic is largely the same as bad money driving out good.

On May 22, 2010, programmer Laszlo Hanyecz used 10,000 Bitcoins to buy two pizzas. As Bitcoin developed, May 22nd became known as Bitcoin Pizza Day. People in the crypto community hold various celebratory events, while the media treats it as a human-interest story, routinely poking fun at the protagonist and calculating the latest market value of those two pizzas. By 2025, this figure first surpassed 1,000,000,000 USD – one billion. If all those zeros are hard to grasp, think of it this way: eating one large pizza is equivalent to eating up an entire Café de Coral (a popular Hong Kong fast-food chain) – not just one branch, but the entire group.

Some blockchain media and YouTubers who focus more on value than price view the event from another angle. They say Hanyecz's transaction set a precedent, proving Bitcoin could be used for everyday purchases and providing a concrete exchange rate for the market. Hanyecz, who stated he has no regrets, is a hero in Bitcoin's development, worthy of being recorded in the annals of money.

The true meaning of Bitcoin Pizza Day is clearly not about someone regretting spending assets that later became astronomically valuable on pizza. Rather, it's that this transaction allowed Bitcoin to be used to buy everyday necessities for the first time, enhancing its "moneyness."

We Are All Protagonists of Bitcoin Pizza Day

On May 22, 2021, the 11th anniversary of Bitcoin Pizza Day, I wrote the above in my #decentralizehk column in Apple Daily.

That sounds grand, but the reality is, on the 15th anniversary of Bitcoin Pizza Day, the world hasn't learned to buy pizza with Bitcoin. Ironically, it has learned never to use Bitcoin for pizza.

What went wrong with our analysis? Where does the problem lie?

Decomposition and Reassembly of the Three Functions of Money

Actually, the analysis isn't wrong, and it's not a problem that no one uses Bitcoin to buy pizza. But if this is a problem, it lies with bad money driving out good.

Don't misunderstand me as mocking the US dollar and other fiat currencies as "bad money." Even if they are, "bad money" here isn't pejorative. Unlike some fundamentalists, I've never advocated for cryptocurrencies to replace fiat currencies (let's not consider stablecoins for now). Instead, I propose that the former should supplement the shortcomings of the latter, fully leveraging the value of cryptocurrencies in application scenarios where fiat currencies fall short. The advantage of fiat currency is its controllability. When well-managed, its purchasing power relative to daily necessities (like food, clothing, housing, and transport) is stable. It's suitable as a unit of account and medium of exchange for daily life, and can also be used to stimulate the economy or rescue markets in extreme situations like a pandemic. As for Bitcoin, its main advantages are its minting being independent of any government and its limited supply, making it more suitable as a store of value.

In the past, due to technological limitations, asset conversion was very troublesome. Choosing an asset as money meant it had to simultaneously fulfill the three major functions: pricing (unit of account), trading (medium of exchange), and saving (store of value). To this day, most people's concept hasn't changed. When choosing money, they consider all three functions together, concluding that fiat currency is the only viable option: "Bitcoin can't buy wonton noodles, so Bitcoin is useless."

However, with technological development, asset conversion has become very convenient. As we enter a "pluralistic" society, the three functions of money can be handled separately. Those who deeply understand the characteristics of cryptocurrency can use Bitcoin as a store of value on one hand, and US dollars or local fiat currency for daily consumption and pricing on the other.

Suppose Bitcoin is currently priced at 60,000 USD, and in four years it will be worth 100,000 USD. I firmly believe this is a very conservative estimate, but if you think I'm overly optimistic, then so be it... Do you think that by paying for everything in US dollars, you won't become a victim? Think deeper. If that's because all your idle assets are in US dollars, it means you're just like Hanyecz at the moment he bought the pizza: choosing the continuously depreciating asset over the continuously appreciating one between US dollars and Bitcoin. In other words, you are precisely a Bitcoin Pizza Day victim, you just don't realize it.

— Thinking, Fast and Slow about Bitcoin Pizza Day, May 22, 2024

As "good money," although Bitcoin has rarely been directly used for daily consumption to date, this doesn't diminish the significance of Hanyecz kicking off Bitcoin consumption 15 years ago. Take gold as an example: an asset must first be usable for consumption before it can possibly become a store of value. Logically, it's impossible for an asset that cannot be used for purchases to be widely accepted as a store of value.

However, whether Bitcoin is suitable for large-scale application in pricing and consumption isn't that important; just think about how unfeasible it is to use gold for pricing and shopping. Therefore, even though El Salvador made Bitcoin legal tender in 2021, conducting a nationwide social experiment that ended in failure early this year, it hasn't harmed Bitcoin's status as an emerging global store of value. Not only does the Salvadoran government continue to buy it, but even the US established a strategic Bitcoin reserve in March of this year. On the corporate front, several publicly listed companies, led by Strategy, have repeatedly issued bonds to continuously acquire and hold Bitcoin long-term.

A Positive-Sum Game for Bad and Good Money

Unless a country wants to control everything and rule the world, for cryptocurrency to win doesn't mean fiat currency has to lose.

The reality is, while Bitcoin's position as a store of value becomes increasingly stable, the US dollar, as "bad money," has also become more ubiquitous through blockchain technology, its role as a unit of account and medium of exchange further popularized. The stablecoin bill GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoins) is in the final stages of debate in Congress, and more US dollar stablecoins are emerging, with their total market capitalization repeatedly hitting new highs. Furthermore, although USDT's market cap is far lower than Ethereum's and an order of magnitude smaller than Bitcoin's, its trading volume often exceeds both, sometimes even their sum, reflecting that USDT's velocity and liquidity are significantly higher than Bitcoin's.

Bitcoin's positioning as "good money" has been established. Next, we'll see how far Bitcoin, currently valued at about one-tenth of gold, can go. On the other hand, the US dollar, which neither needs nor can compete with Bitcoin, faces its real competitors among other "bad currencies." The more people internationally accept a nation's currency for pricing and transactions, the more beneficial it is to that nation's economy. This is a simple truth understood by the US, China, and all countries. Major powers will undoubtedly devise various strategies to increase their currency's liquidity; the roles of blockchain and stablecoins will become increasingly important.

We can't influence international affairs, but we can take care of ourselves. On a personal level, as countries regulate and accept cryptocurrencies, using fiat for consumption while saving in Bitcoin is becoming increasingly simple. The population forced to hold depreciating "bad money" long-term is gradually decreasing. Blockchains like Bitcoin and Ethereum are genuinely bringing monetary choice to the world.

Flexibly managing good and bad money is one of the eight key points of "Moneyverse":

"Further financial freedom is choosing various currencies according to needs."

— Buying One Hundred Dollar of Bitcoin Every Day, Chapter Zero.