Topic: Why is deflation considered to be an admirable feature of Bitcoin? (Read 499 times)

Deflation reduces the motivation for investment and borrowing, locking up value and preventing it from being used. The result is lower productivity. At high levels of deflation, when the gain in the value of the money is greater than any investment, there is the risk of a "deflationary spiral", which will end in a breakdown of the monetary system.

I'm sure there are other problems, but I'm not an expert.

What is interesting to me is that deflation and inflation are both bad, but for opposite reasons. I could have replaced "deflation" above with "inflation" and changed the effects. However, the end result for either is a breakdown of the monetary system.

Could you go into more detail about the sorts of problems deflation might cause Bitcoin, specifically high deflation?

Overweighted admiration in my opinion.

Here are my responses, but seeing how much people disagree, I don't think anyone cares.

There are generally two ways to describe inflation/deflation.

• The more common definition these days is the change in prices. The benefit is that it is a much more practical definition. It describes what people see. The problem is that it is result of many factors and that makes it difficult to measure and impossible to control.
• The other is simply the change in the amount of the money supply. The benefit of this definition is its simplicity and its preciseness. The problem is that its real world prices are not predictable because of the many other factors that affect prices.

Question: Regarding the premise, is Bitcoin deflationary?

Bitcoin's money supply follows a schedule. It increases over time but the rate slows over time until it reaches 0. Whether you are measuring inflation/deflation by changes in prices or changes in the money supply, the effect is inflationary until the rate of creation is exceeded by the rate of loss, at which point it becomes deflationary. If you disregard loss (because it can't be measured), then the effect goes from inflationary to disinflationary instead.

Assertion: Bitcoin's annual inflation rate is ~5%.

Bitcoin's inflation rate as measured by the change in the money supply drops as the total supply increases and the subsidy is halved. At this moment, the annualized inflation rate is 6.25 btc per block / 19190512 btc * 52596 blocks per year = 1.71%. As measured by the change in prices, the inflation rate is simply the change in the value of a fiat currency in terms of BTC plus that fiat currencies inflation rate. I'm not going to calculate that because Bitcoin's price is too volatile.

Assertion: Deflation is when supply reduces over time. It is not a finite supply metric.

As I wrote above, there are two ways to define inflation/deflation.

Assertion: Bitcoin's divisibility will solve demand issues.

If the issue is that there is not enough bitcoins to go around, then I just have to point out that there are 2100000000000000 satoshis -- 100 times the world base money supply in USD. As afar as dust goes, the Lightning Network solves that problem.

Assertion: Bitcoin is neither deflationary nor inflationary.

It depends on how you define inflation/deflation, whether you disregard loss, and whether you are referring to now or in the future.

Debate: Has Bitcoin shifted to store-of-value over being a medium of exchange or unit of account?

Bitcoin has aspects of all three. It isn't one or the other. In order to be a store of value, there must be some source of value and that source is the value as a medium of exchange. In order to be a medium of exchange, Bitcoin must be a store of value because there must be value to exchange. In order to be a unit of account, the value must be stable. The stability comes from Bitcoin's ability to store value and be exchanged.

Reasons "why" deflation is an admirable feature:

Deflation is not an admirable feature. It causes just as many problems as inflation. High deflation is just as bad as high inflation. In the optimal scenario, there would be no inflation or deflation. The benefit of Bitcoin in this case is that nobody can manipulate the money supply for their own benefit.

In economic concepts, deflation is called a period when the price of goods falls, while the value of the currency continues to increase. Personally I don't know what deflation really means for bitcoin. However, I think this is closely related to the buying price and selling price.
Even though bitcoin is undergoing a correction, the value of the currency will not decrease, or it could also mean that supply does not decrease and purchasing power continues to increase. I am more in favor of the store of value and perhaps this is seen as deflation against bitcoin.

At the end of the day, it is the demand and supply that makes deflation considered to be an admirable "feature" of Bitcoin.  As usual with higher demand and lesser supply, the value of any assets will skyrocket.  It is not that Bitcoin has this feature, remember Bitcoin has a fixed maximum supply.  It has no burning mechanism that will deflate its coins in the network.  The coin's maximum coin supply will remain the same.  What is deemed to be deflationary is the coin owner losing their private key and passing away leaving their coins without anyone inheriting them and becoming idle.

Good on you for pointing out the "why" of deflation being an admirable feature: increases purchasing power.

deflation is actually one of the most proeminent feutures cryptos have. It is their main difference and its main advantage against fiat. While fiat is based on inflation (and this could be seen by analysing what happened in the 2008 crisis and what is happening around the world nowadays) cryptos are based on deflation as they have a specific number of coins to be issued like for instace Bitcoin who will never have more than 21 million bitcoin issue while fiat is constantly being issued to counter market conditions which innevitabelly leads to inflation.

Even in cryptocurrencies, there are inflation and deflation in nature. Some have an unlimited supply of tokens like Dogecoin that created in late 2013, making them inflationary while other crypto have fixed amount of tokens in the circulation, making it deflationary. Deflation is considered to be an admirable feature of bitcoin, it impacts consumers positively because it increases their purchasing power, allowing them to save more money as their income increases relative to their expenses.

I agree with this and think it's a valuable point: he wasn't a prophet, but he sure came up with neat ideas.

Not sure it was an admirable feature as much as a unique one that challenged the notion of supply expanding to meet demand (or adjusted to meet goals).

Also, not sure if Satoshi's vision is important any longer, or relevant, beyond historical significance to early onset. I think, as you noted, he was very aware of the shifting climate. Bitcoin's origin, if we acknowledge genesis block's message, was a starting point, I'm sure he knew he could predict, but not foresee what that vision would be in a decade, never mind it being a shared vision by all its users.

The circulating supply will of course continue to deflate, but there’s no real way to even measure it. It’s reasonable to assume that keys will continue to be lost forever, but to what extent and when is simply mere assumption. It’s not a scheduled predictable deflation that will happen by 5% annually and that people can anticipate beforehand. It could be negligible, it could be substantial. It could be substantial and then slow down. It could be negligible and then become substantial and then become negligible again. Its almost impossible to predict something that is solely based on human behaviour in a system that can adjust dynamically. It’s reasonable to assume that it’ll slow down over time in any scenario, as the incentive to not lose them gets bigger the scarcer they become.

Not having an arbitrary monetary policy is one of the most important features of Bitcoin, it’s not so much about if deflation is admirable and inflation disadmirable. Monetary policy is the Achilles' heel of any currency, there are ♾️ points of failure that simply get reduced by having a fixed total supply with random unmeasurable deflation and a policy that can’t simply be changed or influenced by few. How would you even a construct a academic study that could come to this conclusion?

I can assert that it's not a "mere assumption" in that we have demonstrable proof that people have lost their wallets and private keys, which has already reduced the available supply.

It's reasonable to assume this will continue. Heck, here's an example where the Russian GRU appears to have abandoned nearly a whole Bitcoin after their payment trail was identified during the Mueller Investigation: https://www.blockchain.com/btc/address/1J8kvixEnAnGDEDwkfqJS246sXdW1mhkvB

Example: The Welshman who accidentally threw out 8,000 Bitcoin in 2013 is mounting an $11 million campaign to get it back

Satoshi Nakamoto also spoke to this: https://satoshi.nakamotoinstitute.org/posts/bitcointalk/131/

You actually chose one fiat currency that managed to survive the longest. There's only a few of them and there's something they have in common, which is being world reserve currencies.
This ups their demand and boosts confidence, thus saving them from high inflation and a possible reset, but... recently we saw an all time low of GBP to USD. Maybe it's a beginning of something.

Maybe that's what businesses should be doing. Incentivizing you to spend your bitcoin by offering bitcoin users something more and better, something that can't be bought with fiat money, the exclusivity that you've mentioned.

Having bitcoin as an alternative for hard times is also a great idea because it cannot be taken from you at an airport or in times of war. The recent situation in Ukraine can be a good example.
Russian soldiers were looting homes and robbing fleeing Ukrainians. Hiding jewelry or diamonds might work in this situation but moving large amount of cash, or gold is impossible.

If you get your wallet stolen while traveling abroad it's usually a big problem but bitcoin can come in handy if you have a way to access it.

Were the businesses trying to sell cheap products with a lot of transactions per day? Probably also at the wrong time when we had "hash wars". 2017-19 was probably the worst time to be integrating payments because the fees were skyrocketing due to all that drama with BCH and BSV. Now it's much better. You can have a transaction processed for $2.
This won't work at a coffee shop of course, but should be competitive form of payment at restaurants or gas stations and beats the bank when it comes to more expensive stuff like domains and accounts, electronics, luxury goods...


They buy, there's a move up, they feel cheated, but if they spend and there's a move down, they feel good. Just like someone who buys a washing machine to see it on 50% sale the next day. You can never make everyone happy. Some will always feel like they could've done better. I expect big price movements will stop at some point. Bitcoin isn't mature enough but you can see it happening right before our eyes. Bitcoin used to go up 20x and then lose 90% of its price with daily swings of 50%.


I'd like to know what he thinks about it now and how would he like us to adjust. He wanted the community to shape it and make it work the way we wanted, which is why he left it to run its course.
We can only guess that his goal was for his experiment to be a success and whether it was used more as a currency or a store of value was less important.

Satoshi knew all these terminologies will play great role because that’s what he studied first through the traditional banking system and then he “might” have started building the codes for blockchain.

Now obviously this is all my assumptions but he programmed and planned it right in terms of inflationary system. However he also kept the bubble perfectly in shape so as to no one could break it.

Basically it’s admirable that bitcoin is holding it perfectly as planned by Satoshi.

Their ambition is not to seriously compete with the current financial system, otherwise the choice for an inflationary supply wouldnt be taken. If you want to argue economically then you also have to admit that the ability to inflate the supply always leads to increasing inequality over time and is highly suspectible to arbitrary decision making, so its not really suitable for a decentralized global currency that doesnt want to suffer from the trust based model. Neither the human factor nor the effect on increasing inequality can be ignored in the equation. 

If we are looking at monetary economics, then a fixed supply currency will always beat out the inflationary currency in the store of value metrics, which makes it better money that would win out in a free market. And if were thinking about it even more abstractly, then the inability to debase a currency is an innovation that was never available to the masses before this and will probably outlive any VC backed highly marketed playground there currently is out there.

There is no scheduled deflation in the coin issuance. Its a fixed supply currency where a likely slight deflation could occur trough lost coins. A big difference. Lets assume Bitcoin would be used on a global scale and masses of previously disadvantaged parts of the population, now have a way to completely retain their already taxed and worked for purchasing power and maybe see an slight increase from time to time, how isnt this not more admirable than the current reality? To downplay the possible benefit for society would be dishonest.
 
There was no shift to store-of-value, its simple economics. We have two competing currencies circulating, one of them has artificial value attached to it(trough legal tender) and gets constantly devalued (fiat) and the other retains its value over time (Bitcoin). We are in the cycle where people rather spend the bad money and save the good one, so the good money(Bitcoin) gets driven out of the circulation (Greshams law). Until the bad money lost too much value and will no longer be accepted despite legal tender laws (Thiers law). This phenomenon could already be observed in countries like venezuela where people switched from a hyperinflated currency to the USD.

There is no deflationary model and i wouldnt trust what fiat economists define as economic fallacy.

Sooner or later the price will consolidate to a certain degree and then investments into the real economy will outprofit simply holding, theres no free yield like with fiat and shitcoins, so theres actual work and skill required to grow wealth again.

5% deflation wouldnt sustain for long. And again there is no scheduled deflation that can be anticipated beforehand, so people will need to have plans ready for other investments regardless of this, if they want reliable returns in this case. There is an incentive to spend Bitcoin once price discovery is over/ matured.

Simple answer is nobody wants to see their asset value lose its value over time so even if you see bitcoin as deflationary then it is helping the people who is holding where there is no central authority to control it.

Bitcoin is neither deflationary not inflationary it is just as a digital blocks whereas the users decides the price so called demand and supply. etc...

Yes, this is proven true by virtual economies as well: a closed supply leads to hoarding and spiraling prices.

I'm not sure if "simple" is the best description of modern monetary policy.

Are there counterexamples in the real world? For instance, has the British Pound been subject to hyperinflation? Has it been reset?

What incentivizes spending Bitcoin? It doesn't decay if you don't use it. Doesn't it incentivize saving/storing it as an investment for future yield?

These are interesting use cases, especially the latter - which is more of a social construct based on exclusivity.

The second part is possible in jurisdictions like El Salvador where they've made Bitcoin legal tender and might have such an incentive.

The first part has been demonstrated before.

A caveat: I used to help e-commerce businesses transact with Bitcoin but the transaction fees made that untenable. Yes, we have solutions like Lightning today, but that only means that Bitcoin's original vision as having low-fee transactional utility isn't feasible. Unless that wasn't ever Satoshi's vision (but it sure seemed like it, given he also believed mining would be more democratic "across laptops" and hadn't anticipated mining pools yet).

A caveat: those who buy Bitcoin before each major price movement may feel cheated when their "spending" looks foolish in hindsight, and they should've "held on" which, over time, leads to less spending and more hoarding.

I think the evidence is in front of us that it does work as a deflationary currency, alongside other inflationary currencies.

A caveat: just not the way it was possibly intended? How firm was Satoshi on Bitcoin as having low-fee transactional utility vs. being digital-gold-store-of-value? I've read a lot of his emails and work but it always felt like he was adapting to the changing climate as mining hashrate spiraled out of control. Happy to have contrary sources - or, a clear timeline of what "his vision" was and if/how it changed.

It's not deflation necessarily that is the feature. It's the scheduled inflation rate, which is what I'm sure he meant.

The concept is admirable, because every time demand rises for a product or asset, the supply increases; except with bitcoins. Bitcoins cannot be debased. There will be that many in October 25th 2022, that many in 2050, that many in 2140. There's no asset with such predictable inflation rate.

I'm not sure if Ethereum remains inflationary after the Merge. It might have shifted to a deflationary supply model. But that's not the point though. Ethereum could only "me too" in terms of its deflationary model. How about the other features? Ethereum can't "me too" the whole of Bitcoin.

I think Bitcoin's supply model is not only relevant but central to its success. That it only has 21,000,000 in total supply and that it can't be changed give people a big assurance.

The deflationary feature really helps preserve the value which makes it a good Store of Value. It's a fair model unlike fiat currency like dollar which typically loses value overtime due to its inflationary model. Not a good idea to have someone put his/her  "life saving" in dollar long-term as the saving will lose value and won't be able to buy what it normally would buy when the money was first saved... That can be considered cheating. Satoshi certainly don't want that to happen to Bitcoin and it's long-term holders hence the deflationary feature. The feature makes Bitcoin a good Store of Value compared to inflationary currencies.

By the way, Bitcoin could likely become so divisible that printing more will be unnecessary. If demand becomes too high in the future it becomes more divisible.




.

What I am trying to imply was that if someone speculated appropriately, invested in bitcoin at the right time, that it can be a hedge against inflation and also be a store of value.

You don't believe in data? 

You are just have a misconception. Inflation has nothing to do with trade or timing.
Your short time profit/loss is not related to inflation

Usd has a 10% inflation per year and usd/eur pair is reaching news highs every month.

Do you believe in usd inflation data?
 if you bought usd a few months ago there would be no inflation in the United States?

What is inflation? Money declination in value, and persistence rise in price of goods and services.

Assuming all bitcoin are mined, bitcoin reached all-time-high, followed by a significant bear market. If people invested in bitcoin at the time, they may later make profit after several months of unrealised losses. But as they lose, is bitcoin not inflationary at the time? It is, but deflationary in long term. That is why bitcoin should be considered as a speculative asset in short term, because you can invest in it for a short period of time and lose, or make profit from it.

Not only supply of newly mined coins that would result to inflation, also as more people sell an asset like bitcoin, the price will reduce.

Very simple to understand. You can read more about the pizza day, how much bitcoin was worth at the time and compare it to now and see how to large extent bitcoin price has increased. Also you can check every halving, check the lowest price of bitcoin and the highest price, or be checking the highest price of bitcoin in each halving, you will understand that bitcoin has been a store of value after each halving or every four years.

Maybe, but said to be a decentralized p2p means of transferring money which can be central authority independent.

I do not believe all these data, what I believe in is a time to invest to be the right time. Even gold was said to be deflationary and a store of value, but those that invested in gold in 2020 at a be price over $2000 are now losing as the price presently is $1660.

Bitcoin's model is based on asymptotically decreasing inflation: it is dis-inflationary rather than deflationary. That some people assume that in the long run, more and more and more people will start to lose their private keys is a mere assumption that may turn out to be a reality or may not. We easily can assume exactly the opposite: the scarcer bitcoin becomes, the higher the willingness of people to keep their private keys in safety will be, which automatically will sustain a fixed supply.

Are you trying to attack bitcoin or what? All bitcoiners know that value is always subjective, and the perceived rarity of something may impact positively the valuation from different individuals. And by the way, Satoshi wanted bitcoin to become a peer-to-peer decentralized currency,  the main goal of which is to give people a way to peacefully opt-out from the traditional financial system to transact with whoever they want, permissionlessly. He never talked about speculation or bitcoin price and didn't sell a single bitcoin.

That is not what "success" means. Success is defined with having real adoption in the real world not just having a price on an exchange. For example there are currently altcoins that don't even have a blockchain anymore but they are still being traded on some exchanges like Yobit and have a price. By all definitions these altcoins are dead but they have a "value" still.

Technically since you can always create more NFTs that are exact copy of each other, their supply is unlimited regardless of what one of them does.

You should know that just because you see a lot of people talk about bitcoin as an investment, that doesn't mean bitcoin has made a "full transition". The fact is that people talk about price and profit more than they talk about bitcoin as a currency but the adoption as a medium of exchange grows side by side with the adoption as an investment.
For example if you check the number of "payments" using bitcoin in shops accepting bitcoin payments, the bitcoin payment processors, etc. you can see this growth clearly.

I don’t believe Bitcoin can be classified as an inflationary currency. This is because we know how many exist and none can ever be made beyond that limit of what can be mined. That can be interpreted however you’d like, but in the end it is this 21M limit that gives Bitcoin it’s value proposal. No entity being able to inflate the units gives Bitcoin a unique store of value argument that has so far seemed popular enough to propel the market cap into the trillions at one point and is still very much in a growth pattern.

Deflationary is when supply reduces over time. It is not a finite supply metric.

Even with 4M btc were lost so far, that that doesn't mean people will be losing enough btc over time to make it deflationary.  Network stills generates 5% of total supply per year, which is about 1M btc per year.

4M were lost when it wasn't worth much money... people will be losing at slower rates from now on.

Interesting, but how do we reconcile this with Ethereum's "me too" demonstrated store-of-value given it has an inflationary supply model?

Is the deflationary supply model even relevant to Bitcoin's success right now? How would we prove or measure that?

People call it as deflationary because of its finite supply that can not be changed.

How is the 21 Million Bitcoin Cap Defined and Enforced?

Additionaly, I have one topic Investigate, assess news. Don't simply read and make wrong decisions in which I estimated about 4M BTC was lost. Obviously, it's only an estimation and the actual lost BTC would be either bigger or smaller than that figure.

Explore and make your own estimation with HOLD waves from lookintobitcoin.com

Whether it will prove to be an economic fallacy or not, only time will tell. But the fundamental laws of economics about supply and demand probably affected Satoshi's idea when he designed Bitcoin. He envisioned Bitcoin to be used as a peer to peer currency. The demand won't go down because its money. And because the supply is deflating, the value of Bitcoin is expected to rise over time. But let's not forget that this is all an experiment.

Satoshi must have also deeply studied the fatal flaws of fiat. And its inflationary system is one of them.

So far it seems Satoshi is right. One of the reasons why people store value in Bitcoin is that it has a fixed supply that can't be abused by anybody.

To be fair, Bitcoin was created to solve the problem of double-spending in digital currencies - and it succeeded.

I admit I'm skeptical that Nakamoto's desire for a deflationary end-game has merit, given that his original vision for "peer-to-peer cash" died during the unanticipated arms race of CPUs -> GPUs -> ASICs. If TX fees were natively better than credit cards it'd be competitive in that way, but it's not. His brilliance was in PoW and the timestamp system itself, not necessarily in prophesying economic design patterns.

What I see today is that Bitcoin has made a full transition to store-of-value and speculative investing. And, since there's a deflationary model waiting at the end, it feels like we're just going to see a repeat of what happens in the other closed supply virtual economies we've seen over the last 25 years: crashing and burning.

I'd like to be wrong and would love to see more data/research on why "deflation" is a good idea; not just anecdotes about hyperinflation risks.

Are there any economic analyses of Bitcoin by academic researchers with economic backgrounds that believe the deflationary model is good in the long run?

Hyperinflation is one of the many problems we have in current finance or economy, it is very common and if you will take a look it is a very devastating situation for consumers, especially in some countries where the inflation rate is increasing in huge percentages, so Bitcoin is solving it, Bitcoin created to solve this. And if you take a look on the long term goal of Bitcoin and how it really works as time goes by, it is indeed to solve inflation rate especially when our governments can print unlimited fiat currency which is also a trigger for increasing the inflation rate.

I love this explanation because it seems to demonstrate Bitcoin acting like a proper market because the supply is still open (even if the end-game model is deflationary), while most NFTs with their closed supply models seem to immediately follow the product adoption curve and wither away.

Bitcoin is not deflationary. It is inflationary.

In this classic Chart you can see that bitcoin inflationary rate is about 5% a year

Fiat monetary systems rely on inflation because otherwise people would hoard it and starve the economy. These systems are built very simple. Fiat is made to last a century or two and then it goes into hyperinflation and needs to be reset, but what if you had an alternative to your fiat money that can be hoarded and also spent, but spending it would be incentivized somehow. What if businesses that want you to pay with bitcoin lower the prices. What if there's less tax on bitcoin payments? What if Bitcoin users become VIP clients in certain places?

We spend fiat money because we know it loses value so you choose investments, but investments block your ability to spend. We can't sell bonds, gold or real estate fast enough to be able to fill our gas tank or book a plane ticket.

You could say people will never spend their bitcoin knowing that it deflates but what if it stabilizes and starts to deflate 5% a year? It's going to feel safe enough to hold as an investment while being spendable without regrets.

IMO bitcoin can work as a deflationary currency especially alongside another inflationary currency.

---

Given that we've seen other cryptocurrencies & blockchains that have inflationary models still "succeed" in the sense of having transactional value, why is deflation considered an admirable feature of Bitcoin?

In virtual world economies we know that closed supplies inevitably lead to mudflation, unsustainable pricing, and rampant speculation (Koster, et al).

How much did the deflationary model contribute to Bitcoin's shift to store-of-value?

Was the whole premise of starting Bitcoin under a deflationary model based on an economic fallacy in the hopes it would encourage valuation?

---

Feedback Summary from Comments

Question: Regarding the premise, is Bitcoin deflationary?

Assertion: Fiat will always suffer from hyperinflation; only lasting a century or two.

Assertion: Bitcoin's annual inflation rate is ~5% 1.82% (2022-10-26).

Assertion: Deflation is when supply reduces over time. It is not a finite supply metric.

Assertion: Bitcoin's divisibility will solve demand issues.

Assertion: Bitcoin is neither deflationary nor inflationary.

Assertion: Inflation is correlated with human decision making.


Debate: Has Bitcoin shifted to store-of-value over being a medium of exchange or unit of account?

Facts:


Reasons "why" deflation is an admirable feature: