Is Bitcoin deflationary and inflationary at the same time?


This is a tough question.

I'd consider Bitcoin as being just deflationary. Why?

Because, instead of thinking about mining as "adding new currency", you could consider that mining is just "enabling" more coins each block from the 21 million total coins. Everyone knows that ultimately there will be 21 million coins, just not all of them are spendable.

Quoting Wikipedia on inflation:

In economics, inflation is a persistent increase in the general price level of goods and services in an economy over a period of time.

It's clear that the increase of the amount of Bitcoin in circulation is not persistent. I ends. We all know when and why and how much there will ultimately exist.

That said, why is Bitcoin deflationary. Again quoting Wikipedia:

Deflation occurs when the inflation rate falls below 0% (a negative inflation rate).

One can argue that after the last block reward has been paid, the amount of bitcoins will stay the same....

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Deflation has been a point of debate among the various schools of economic thought for a very long time. One one hand, the Keynesians and Neo-Keynesians argue that deflation is a very negative economic phenomenon and constantly warn of a “deflationary death spiral,” in which people will stop spending indefinitely—in constant anticipation of lower prices—and businesses will fail. Obviously, if all the business failed there would of course be huge waves of unemployment and economic depression. On the other hand, the Austrian school, and some students of the Chicago school, argue that a “deflationary death spiral” can not happen in the real world. Austrian economists especially argue that such a concept only holds weight in a static or evenly rotating economy—a theoretical construct where the economy is in perfect equilibrium, there is no economic growth or decay, and profits equal costs—and is completely irrelevant in the real world.

Ludwig von Mises (left) and John Maynard...

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Bitcoin is the currency of the Internet: a distributed, worldwide, decentralized digital money. Unlike traditional currencies such as dollars, bitcoins are issued and managed without any central authority whatsoever: there is no government, company, or bank in charge of Bitcoin. As such, it is more resistant to wild inflation and corrupt banks. With Bitcoin, you can be your own bank.

If you are new to Bitcoin, check out We Use Coins and You can also explore the Bitcoin Wiki:

How to buy bitcoins worldwide
Buying Reddit Gold with bitcoin

Will I earn money by mining bitcoin?

Security guide for beginners - (WIP)

Community guidelines

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In common usage, deflation is generally considered to be “falling prices” while Inflation is “rising prices”. Actually this is “price inflation” as opposed to “monetary inflation”. For more information see What is Deflation? and What is Inflation? and Inflation Cause and Effects.

So if inflation is rising prices and deflation is falling prices, how can prices rise and fall at the same time? Somehow that seems counter intuitive.

Obviously, when the Bureau of Labor Statistics comes up with the Consumer Price Index it is either higher or lower than the month before so we have inflation or deflation.

But that is the number for the whole economy, it includes over 10,000 items and takes into consideration all aspects of the economy.

However, every month some prices are rising while others are falling. So the inflation rate is a compilation of all of these factors. Currently, we have some major inflationary forces combined with some deflationary...

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Bitcoin and Ethereum are the most used cryptocurrencies. While the two are built with the same technology, they differ in their technical and governance designs. To its developers, Ethereum is a better version of bitcoin.

The following are areas bitcoin and Ethereum differ:

Identity of Founders

The only contact the community around bitcoin has had with its founder are contributions to online forums under the pseudonym Satoshi Nakamoto. The last of these was made in December 2010.

The founder-anonymity has added to bitcoin’s decentralized, open source and community owned nature. Its drawbacks however includes discussion on the protocol improvement such as the scaling debate becoming difficult as there is no figurehead to provide guidance.

Meanwhile, the founder of Ethereum Vitalik Buterin is a well-known figure and a common speaker in events around the world. In July 2016, he rallied the community to change the core software to save funds in a...

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In the world of cryptocurrency, there are two main types of ecosystems. Either a cryptocurrency is inflationary – with new coins generated by mining or staking – or it is deflationary. A lot of people claim bitcoin’s deflationary status is a problem, and how minor inflation could alleviate these concerns. However, there are different aspects of either concept that need to be taken into account first.

2. Deflation

Most cryptocurrency enthusiasts are well aware of how bitcoin has a fixed supply cap of 21 million coins. It is expected the last bitcoin will be mined around the year 2140, even though a large portion of the available supply is in circulation already. Some financial experts claim bitcoin’s capped coin supply is a problem, as it makes the popular cryptocurrency deflationary. Since no additional coins will be brought into circulation from that point forward, there will be no more inflation for bitcoin.

Deflation in the traditional financial ecosystem...

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Deflationary spiral is an economic argument that proposes that runaway deflation can eventually lead to the collapse of the currency given certain conditions and constraints. It is a common criticism made against the viability of Bitcoin. The ‘deflationary spiral’ is a real condition that affects the popular fractional reserve backing system. Bitcoin is not affected by this because it is fundamentally different from popular currency.

Deflation is a decline in the general price level. Deflation occurs when the price of goods and services, relative to a specific measure, decline. It is not necessarily that the value of the goods and services themselves declined, but can be because the value of the currency itself increased.

For example, let us consider an economy comprised entirely of beef and oranges where the medium of exchange is gold. Both beef and oranges can decay and are not consistent, and therefore cannot be used as a currency. In order to trade, people...

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Although it has been overshadowed in recent months by mostly regulatory news, the issue of deflation and bitcoins is still a topic worthy of debate. It was one of the biggest criticisms that faced bitcoin earlier this year as the price rose to an all-time high. Most of the bearish views on bitcoin deflation came from economists, who may or may not have understood the true nature of bitcoin.

What is deflation?

The general idea is that deflation is a decrease in the price of goods and services. In this case, we are specifically talking about bitcoins. As bitcoin's value goes up, the cost of paying for things in BTC goes down as a result of an item’s fiat monetary value staying the same. This might trigger deflation, and some economists believe that once it starts happening, deflation will spiral out of control.

Deflation’s overall drop in prices reduces economic activity. It can cause investors to hold onto a currency, which can make the problem even worse. This...

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Inflation vs Deflation

Inflation is a common phenomenon in modern times and is seen in nearly all economies. It is a situation where prices of commodities increase with a simultaneous decrease in the value of the currency. If you buy a product for $100 and then go to the market next year to buy it again, you are surprised to see it selling for $110. It is a result of inflationary forces while erosion in the value of dollar. There is no unison among economists when it comes to a universally accepted definition of inflation. While some define it as rise in prices, others prefer to call it erosion in the value of currency. Deflation is another situation that is exact opposite of inflation. If the same product is available at $95 next year, you would be pleasantly surprised but it is because of deflation. Let us see the differences between inflation and deflation.

Deflation is characterized by a contraction or shrinking purchasing power. It is a condition where...

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J. M. Keynes in his famous book 'General Theory' put forward an analysis of unemployment and inflation. The Keynesian theory assumes that a maximum level of national output can be obtained at any particular time in the economy. According to him the maximum level of national income is generally referred to as full employment level of national income. If the equilibrium level of national income coincides with the full employment, there will be no deficiency of aggregate demand and hence no dis-equilibrium unemployment (seasonal, frictional unemployment can exist at this level).

Now if the equilibrium level of income as determined by the AD (aggregate demand) and AS (aggregate supply) is not equal to the level of full employment, then two situations can arise. Either this equilibrium level will be below the full employment level or above the lull employment level. In case, the equilibrium income is below the potential income, it indicates the presence of recessionary gap. If it...

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Readers Question: What is the cause of deflation?

Deflation involves a fall in the price level – a negative rate of inflation. From a very basic standpoint, there are two main potential causes of deflation:

A fall in aggregate demand (AD) A shift to the right of aggregate supply (AS) – i.e. lower costs of production through improved technology.

Deflation usually occurs during a deep recession, when there is a sustained fall in demand and output. This deflation may occur in the aftermath of credit boom and bust or severe tightening of monetary policy. Monetarists place emphasis on the role of the money supply – falling money supply and / or velocity of circulation causing a fall in the price level.

In rare circumstances, rapid growth in technology may enable lower prices, whilst at the same time increasing output. This could be termed ‘benign inflation’ as output increases.

Falling Aggregate demand

This simple AD/AS model shows that a fall...

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I appeared today on The Attitude, broadcast by WNHN 94.7 in Concord, New Hampshire, to talk with host Arnie Arnesen about the Bitcoin phenomenon. The podcast of the second hour of the show can be accessed at the link below. My appearance occurs right at the beginning of the hour:

The Attitude – Bitcoin

The purpose of our brief discussion was just to provide some general background information for Arnie’s listeners about Bitcoin, including what bitcoins are and why anyone would buy them or accept them in exchange for goods and services. We touched on several topics related to the Bitcoin phenomenon, but there is one very peculiar and puzzling feature of Bitcoin that we didn’t get to discuss and that seems especially important to me: the Bitcoin system has what appears to be a built-in deflationary architecture.

When the Federal Reserve System was created, it was charged with providing the US with an “elastic currency”. That means that the quantity of Fed-issued...

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When discussing the distributed cryptocurrency Bitcoin, I frequently get the question from reporters and economists if a deflationary currency really can survive.

It’s an interesting thought. We’re so used to living in an inflationary economy, where money gradually loses its value, that we have a hard time imagining what it would be like in an economy where a certain amount of money slowly became more valuable as prices fell.

Since we have only lived in inflationary (and hyperinflationary) economies, there are bucketfuls of assumptions of why a deflationary economy wouldn’t work. The strongest objection I hear is that nobody would buy anything today, since the same thing would be cheaper tomorrow. And they wouldn’t buy it then either, because it would be cheaper the next day again. And so on, so nobody would buy anything, ever: we would all be waiting indefinitely for everything to drop in price.

No, really. This is an argument that’s being presented as...

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In the comments on one of the Bitcoin posts, someone posited that Bitcoin is deflationary. Other posts on Bitcoin that I have seen have said similar. Others worry it might be inflationary, since it’s easily divisible.

It’s neither and here is why.

What causes inflation in fiat money? It’s not printing more money. Since 2008, the Federal Reserve has created more money than ever before in our history and we don’t have inflation. We do have the kindling laying around for inflation. If you spoke with the Fed, they’d like to see a little inflation!

Here is what causes inflation:

Demand pull. When an economy is at full employment and has too few dollars chasing too few goods. Prices rise. This could also be describes as a rise in demand relative to supply. Once the supply curve changed and demand was met, prices could drop. Market power. If a company can raise prices without worrying about competition, inflation could result. Supply shock. For some reason, the...
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