I. Bitcoin inflation. Bitcoin is regularly described as “deflationary”, “designed to deflate”, “non inflationary” etc. This is not at all true in the present tense and dubious in the future tense. Specifically, here’s the evolution of Bitcoin MB :
http://blockchain.info/charts/total-bitcoinsSo now, what deflation are we talking about ? With the MB going from just under 9mn to just over 11mn over the course of one year it’d stand to reason that Bitcoin inflation is a very healthy 25% a year. Of course it speaks volumes to the desperate situation of fiat currencies that the Bitcoin exchange rate has appreciated from two to three digits over the same interval its inflation was “only” 25%, but nevertheless : you can’t talk of deflation in an environment which inflates from under 9 to over 11 in a year. It just makes no sense.
That aside, consider the problem of the M3 : If you credit the monetization of S.MPOE theory, for instance, that’s a solid 0.7mn that has been added to the M3 on top of the ~2.3 mn added through sheer Bitcoin printing. We are talking over 30% M3 inflation for the 2012 Bitcoin fiscal year, folks.
This trend will only continue, and as the pressure for the M3 meeting actual economic activity increases the compensatory mechanism of financial instrument monetization will go into full bore, easily deleting by orders of magnitude any and all deflationary effects (such as the small and rapidly diminishing loss of coins through actual physical destruction of wallets / passwords / etc).
In short : Bitcoin is not deflationary. It inflates, and can inflate abundantly, but only through market-directed processes. The fiat process of inflation is unavailable. That is all. To say Bitcoin is deflationary is akin to saying a married woman is sterile. No, she’s not, the balance of new life is created by married women. They just don’t happen to be available to the general public through its “elected” representatives, that is all.
Full article on
Trilema.
