In this regard, Bitcoin is the good one while fiat is the bad one, and due to some reasons, the bad money might drive out the good money (Bitcoin). I also get the point that the good money (Bitcoin) can oust the bad money which makes it to be like a competition between the government and freedom in relation to centralized and decentralized money holding and usage.


I want to be more specific on Bitcoin, it was not created to oust fiat, it was create to give freedom and privacy which is just an alternative to centralized money. If the true design of Bitcoin can make fiat go to an extinction, the government can regulate it, most people nowadays do not even care about privacy while they prefer the use of custodial means to use Bitcoin and other cryptocurrencies  (although, I am not recommending that).

Bitcoin does not totally fall into this category as a money that will disappeared, but it fall into the category of good money. Some countries especially the Western countries see the good reason to allow citizens to use this Bitcoin and other cryptocurrencies, while the governments are trying to regulate it. Bitcoin is not even showing any sign of extinction because the governments of the world are thinking differently. Fiat will remain fiat which is inflationary while Bitcoin will remain deflationary and an alternative to fiat and a store of value.

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I even see fiat as good and the reason people embrace Bitcoin and other cryptocurrencies, without the fiat, why will people be buying bitcoin, if nothing that fiat is inferior in value to Bitcoin, people will not embrace bitcoin, it is because the fiat is a deflationary currency is the reason people see the value in Bitcoin as a safe haven. We are just in the world fiat will coexist with Bitcoin and other decentralized currencies.

I haven't thought much about this situation, but an interesting thing is happening.
The more Bitcoin gains popularity, the more people will keep Bitcoin as a store of value, because the amount of Bitcoin is limited.
Therefore, the number of coins on the market will decrease.

In recent years it has always happened like that and looking at the data on Glassnode it is clear how the shortage of bitcoin on the exchanges in favor of the long-term holders brings the price to rise inevitably.
Among the exchanges, with the next bull run be prepared to see some blowing up because many operate in fractional reserve. And when the market will bank-run the balance sheets of the exchange (mostly fake) will not be able to honor the positions of customers (most of them).
So hold on to your keys (better multi-sig).
You know we always talk about it.

So basically this is a very long way of saying that we can't use cryptocurrencies for purchasing unless they are accepted and regulated by the government. Didn't we all know that before?

Also, I think it is a little inappropriate to apply Gresham's law dated 1560's which was accurate for THAT economy in today's world. Things have changed since then. Just one example, at that time the options for investment and storing value were very limited, so there was "bad" money and "good" money. But I think many would agree that nowadays in terms of STORING there are better options than cryptocurrencies, it's not what they were meant for.

So, to conclude, Bitcoin hasn't fallen into any kind of trap, it's going to be just fine.