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How is bitcoin deflationary when it (currently) has a fixed inflation?

by T0Bi 6y ago

edm0nd 6y ago
got em
PragmaticPulp 6y ago
Contrary to the pop-culture definition, inflation isn’t purely driven by fiscal policy or money supply. Supply and demand (aka cost-push inflation and demand-pull inflation) are the main drivers. Fiscal policy modulates these factors, but inflation existed long before fiscal intervention. Bitcoin adoption is a deflationary process because an increasing number of people are competing over a fixed (ultimately) supply of Bitcoin. If more people want Bitcoin, the price goes up. Why do more people want Bitcoin? Because the price goes up. The cycle reverses when the price starts going down.
koboll 6y ago
If bitcoin is a currency, then the prices of things in bitcoin have fallen over time. What cost 40,000 BTC a decade ago now costs 1 BTC. But bitcoin is more of an asset than a currency, so speaking of it in terms of inflation / deflation leads to oddities, like this.
- PragmaticPulp 6y ago
  > But bitcoin is more of an asset than a currency, so speaking of it in terms of inflation / deflation leads to oddities, like this. Assets inflate and deflate. It’s not an oddity.
adam_arthur 6y ago
Deflationary relative to the USD and other fiat currencies. The world is never going to run primarily on BTC, so talking about inflation purely in terms of number of BTC is a bit pointless :)
tfehring 6y ago
Inflation isn’t strictly a measure of the monetary base. The dominant factor in “inflation” of (almost?) all cryptocurrencies is demand, not supply. Now, you can make the argument that that’s not really inflation - that BTC won’t predictably ~double in value every year going forward, and therefore one shouldn’t be afraid to spend it - but the idea that the tiny rate of increase in supply should be a major factor in that decision is pretty silly. Also, it’s not obvious that it’s being mined faster than it’s being eliminated due to lost keys.
Jtsummers 6y ago
It's getting wider ownership over time so BTC supply is increasingly limited per person/entity interested in it, and the increase in supply is at a decreasing rate over time. This wider ownership and the (ultimately) fixed amount means that it will, even if not monotonically, be a deflationary currency (to the extent that it even is a currency). The rate of new BTC production has to overcome this deflationary pressure, and since there's always less coming out over time the potential inflationary pressure of minting new BTC will become increasingly insignificant. Any currency with a limited supply will tend to be deflationary over time, though not necessarily experiencing a deflationary spiral depending on the overall economy around it. An active economy will see enough movement of the currency that deflation will, hopefully, be small. But an inactive economy (like bitcoin's) with people hoarding rather than spending will see higher-than-healthy (from an economic perspective, it's great for the hoarders if they can use it later) deflation rates.
uncletammy 6y ago
When people say it's deflationary, they mean "in the long run". Bitcoin has a fixed, predetermined inflation schedule which approaches zero over time. So, considering the inflation schedule alone, it's "eventually" deflationary. When you start to account for other things like lost and unrecoverable coins, it becomes severely deflationary and much sooner. Things like grandpa taking his encrypted wallet to the grave or in the case of bitcoin BTC, small coins that can't be moved because the fee is higher than the coin's value. At the time of writing this, coins worth less than ~ $6.15 (USD) aren't able to be spent*. That means if you bought a $4 coffee with BTC and paid with a tenner (a coin [input] worth $10) , you'd lose the change. It would remain unspendable until the network starts unclogging. * By "arent able to be spent" I mean, reasonable fee estimations for getting the transaction into a block within an amount of time that you can be sure the transaction won't get dropped from the mempool. I used https://bitcoiner.live https://bitcoiner.live to estimate the fee which was the most generous of the three I looked at.

How is bitcoin deflationary when it (currently) has a fixed inflation?

by T0Bi 6y ago

How is bitcoin deflationary when it (currently) has a fixed inflation?

edm0nd 6y ago

got em

PragmaticPulp 6y ago

Contrary to the pop-culture definition, inflation isn’t purely driven by fiscal policy or money supply. Supply and demand (aka cost-push inflation and demand-pull inflation) are the main drivers. Fiscal policy modulates these factors, but inflation existed long before fiscal intervention. Bitcoin adoption is a deflationary process because an increasing number of people are competing over a fixed (ultimately) supply of Bitcoin. If more people want Bitcoin, the price goes up. Why do more people want Bitcoin? Because the price goes up. The cycle reverses when the price starts going down.

koboll 6y ago

If bitcoin is a currency, then the prices of things in bitcoin have fallen over time. What cost 40,000 BTC a decade ago now costs 1 BTC. But bitcoin is more of an asset than a currency, so speaking of it in terms of inflation / deflation leads to oddities, like this.

PragmaticPulp 6y ago
> But bitcoin is more of an asset than a currency, so speaking of it in terms of inflation / deflation leads to oddities, like this. Assets inflate and deflate. It’s not an oddity.

adam_arthur 6y ago

Deflationary relative to the USD and other fiat currencies. The world is never going to run primarily on BTC, so talking about inflation purely in terms of number of BTC is a bit pointless :)

tfehring 6y ago

Inflation isn’t strictly a measure of the monetary base. The dominant factor in “inflation” of (almost?) all cryptocurrencies is demand, not supply. Now, you can make the argument that that’s not really inflation - that BTC won’t predictably ~double in value every year going forward, and therefore one shouldn’t be afraid to spend it - but the idea that the tiny rate of increase in supply should be a major factor in that decision is pretty silly. Also, it’s not obvious that it’s being mined faster than it’s being eliminated due to lost keys.

Jtsummers 6y ago

It's getting wider ownership over time so BTC supply is increasingly limited per person/entity interested in it, and the increase in supply is at a decreasing rate over time. This wider ownership and the (ultimately) fixed amount means that it will, even if not monotonically, be a deflationary currency (to the extent that it even is a currency). The rate of new BTC production has to overcome this deflationary pressure, and since there's always less coming out over time the potential inflationary pressure of minting new BTC will become increasingly insignificant. Any currency with a limited supply will tend to be deflationary over time, though not necessarily experiencing a deflationary spiral depending on the overall economy around it. An active economy will see enough movement of the currency that deflation will, hopefully, be small. But an inactive economy (like bitcoin's) with people hoarding rather than spending will see higher-than-healthy (from an economic perspective, it's great for the hoarders if they can use it later) deflation rates.

uncletammy 6y ago

When people say it's deflationary, they mean "in the long run". Bitcoin has a fixed, predetermined inflation schedule which approaches zero over time. So, considering the inflation schedule alone, it's "eventually" deflationary. When you start to account for other things like lost and unrecoverable coins, it becomes severely deflationary and much sooner. Things like grandpa taking his encrypted wallet to the grave or in the case of bitcoin BTC, small coins that can't be moved because the fee is higher than the coin's value. At the time of writing this, coins worth less than ~ $6.15 (USD) aren't able to be spent*. That means if you bought a $4 coffee with BTC and paid with a tenner (a coin [input] worth $10) , you'd lose the change. It would remain unspendable until the network starts unclogging. * By "arent able to be spent" I mean, reasonable fee estimations for getting the transaction into a block within an amount of time that you can be sure the transaction won't get dropped from the mempool. I used https://bitcoiner.live https://bitcoiner.live to estimate the fee which was the most generous of the three I looked at.