Topic: [2015-11-15] Bitcoin and the Deflationary Spiral – a Double Edged Sword (Read 268 times)

This question had been discussed a lot a couple of years ago. The main argument in the piece by the link seems to be that Bitcoin is an infinitely divisible currency and the amount of coins needed for transactions will reduce proportionally as its price rises. But that is irrelevant to the cause which brings about deflationary spiral. In other words, if the reason given were true, then deflationary spiral wouldn't be possible since you can always add zeroes to a currency unit via denomination reforms (in this case subtract zeroes). Obviously, it won't and couldn't work in practice because deflation is not caused by the lack of decimal places and you can't fix it by adding more, which is what the claim made basically comes down to.

The deflationary spiral theory says that if prices are expected to fall, people will move purchases into the future in order to benefit from the lower prices. That fall in demand will in turn cause merchants to lower their prices to try and stimulate demand, making the problem worse and leading to an economic depression.
Although this theory is a popular way to justify inflation amongst central bankers, it does not appear to always hold true and is considered controversial amongst economists. Consumer electronics is one example of a market where prices constantly fall but which is not in depression. Similarly, the value of bitcoins has risen over time and yet the size of the Bitcoin economy has also grown dramatically along with it. Because both the value of the currency and the size of its economy started at zero in 2009, Bitcoin is a counterexample to the theory showing that it must sometimes be wrong.
Notwithstanding this, Bitcoin is not designed to be a deflationary currency. It is more accurate to say Bitcoin is intended to inflate in its early years, and become stable in its later years. The only time the quantity of bitcoins in circulation will drop is if people carelessly lose their wallets by failing to make backups. With a stable monetary base and a stable economy, the value of the currency should remain the same.

There have been multiple mentions of bitcoin ending up in a deflationary spiral on the long run. At a bird’s eye view for a layman it sounds true. However, if one takes some time to study bitcoin and understand in detail then it will become obvious that bitcoin is quite different from conventional fiat currency and the deflationary spiral that is perfectly applicable to fiat currency at certain circumstances doesn’t apply to the well-known digital currency.

http://www.newsbtc.com/2015/11/15/bitcoin-and-the-deflationary-spiral-a-double-edged-sword/