Wrong. Transaction volume is up, significantly.
So my working theory is because bitcoin is inelastic, the value is rising so fast that the deflationary effect hits some tipping point, offsetting Gresham's Law. There could be some "point" where people don't mind spending the stronger currency, because it takes so much less of it to purchase the desired good or service.
All this has a very simple explanation without ever offsetting Gresham's Law. In fact, it actually confirms this law. Let's assume for a moment that Gresham's Law is infallible and fully applicable in this case. Really, if the principle behind it has been known since Ancient Greece, then why should it fail right now?
Simply put, Gresham's Law says that one money is better than another. If that's true, this would inevitably mean that people still think dollars (or whatever) are better than bitcoins because they prefer to pay in Bitcoin while withholding their dollars, no other way around. Why would they? Deep inside they don't believe Bitcoin will be a success in the long term and are just trying to make use of an opportunity that Bitcoin high price gives them...
And everything is in strict accordance with Gresham's Law
I guess it comes down to whether you believe bitcoin is a better money than the fiat (which was my underlying assumption - because it's inelastic ) vs what you're saying - that it's not and people are utilizing the higher prices in bitcoin to capture the value by spending it.