Deflation and inflation of bitcoin
Bitcoin believers reject inflation.
We believe that inflation represents a receding, silent tax - slowly shifting wealth from the ordinary to power.
However, in economics, although inflation is not a good thing, the opposite of deflation can also make the economy stagnate.
This article will discuss:
(1) discuss the basic concept of deflation;
(2) to solve the economists' worries about the falling price;
(3) the money supply of bitcoin is actually against deflation.
In financial terms, deflation and inflation are relative. We are familiar with inflation. In short, there are more currencies in the market. Relatively speaking, commodities are limited, and more currencies need to be "digested" per unit of commodity, thus causing inflation. Deflation, on the contrary, is characterized by insufficient money supply and downward price trend.
In this sense, bitcoin is not really deflation. The supply of bitcoin will not decrease, but will continue to increase until block rewards run out sometime around 2140. By then, bitcoin will have reached the theoretical ceiling of 21 million.
In the figure below, you can see the bitcoin release rate chart, which starts with relatively high inflation rate, and then gradually becomes stable over time, reaching the hard ceiling of 21 million coins.
In the long run, bitcoin is neither inflationary nor deflationary. Instead, it is programmed to end up with a constant amount of money without changing the supply.
"Even though the base is expected to remain the same, lost bitcoins are deflationary because they are actually money that disappears from the current supply," one would say
But also worry. As bitcoin security awareness and means become more and more professional, the loss of bitcoin will decrease with the passage of time. The highest bitcoin loss rate is only in the earliest period, which has eased after people realized its value. Therefore, as the supply of bitcoin approaches to zero, the situation of losing money will decrease, and finally reach a good balance.
Another view is: "although the supply of bitcoin may be constant, the population is growing. As a result, as more and more people buy a fixed amount of money, a rigid money supply will lead to deflationary pressures. "
This is also a wrong idea. In all cultures, population growth declines as societies experience urbanization and higher levels of education. As the regions with the highest population growth continue to industrialize, this downward pressure will continue into the future.
These are the latest UN estimates of population growth. It is predicted that the population will reach a balance by 2100. It's really ideal - the world's population level matches bitcoin output close to zero. Is this a coincidence or a design?
So literally, bitcoin is not deflationary. With a constant quantity, bitcoin will not exert any internal pressure on the price to rise or fall. It will serve as a pure basis for the price to fluctuate only according to the signals of market participants.
When people worry that bitcoin is "deflationary", they are actually worried that "deflation will bring down the price!"
Here are three main concerns:
The miners are angry at the fall in the yield on the currency standard.
The actual debt burden of bitcoin denominated loans is increasing.
The practice of saving money on the basis of currency is not investment, because there is no increase in earnings.
Many economists suggest that deflation is a disastrous economy that should be avoided in any case. Because in a period of rapid deflation, people expect commodity prices to fall, and people will store money to avoid spending it. This phenomenon has flooded the "lost decade" of Japan's economy because of stagflation after the collapse of demand.
The collapse of demand means that the purchasing power of currency continues to increase and the relative prices continue to fall. At this time, people are more willing to hoard money than to use it for purchase and consumption. As a result, the commodity is unsalable and the economy cannot develop, resulting in stagflation. At the same time, currency appreciation means that liabilities are also appreciating. The impact of liabilities such as personal loans and enterprise accounts payable is growing. On the one hand, it affects consumption capacity, and on the other hand, the bad debt rate is rising, which brings harm to social economy. So economists say the negative effects of deflation are terrible.
Bitcoin experts believe that deflation itself is not bad. To be more precise, we associate deflation with a collapse in demand because of a special case in the past (Japan). In the legal currency world, money is likely to be printed without restrictions, unless there is a complete collapse in demand and no willingness to issue money, so it is difficult for the economy to enter a stagflation period. The deflation of bitcoin is not caused by the collapse of demand. It follows a predetermined and controlled money supply model.
Or we can use bitcoin as a speculative object for short-term operation. And the legal currency still occupies the primary position in the minds of people in the contemporary society, with the US dollar, euro, RMB and other trading means as well as precious metals such as gold as the means of storing value. Therefore, bitcoin will not cause economic deflation of the whole society in the short term.
In fact, deflationary currency will make sellers consider the impact of discount, and it is easy to induce excessive hoarding instinct, unless the discount rate exceeds the buyer's hoarding instinct. Because both buyers and sellers have the motivation of hoarding, the two discount rates will reach a balanced price because the hoarding instinct of both sides offsets each other. So even if the discount rate of bitcoin price is 30%, most retailers who use bitcoin will not feel that it is difficult to spend bitcoin, so they can make profits. Of course, it remains to be seen whether bitcoin, a deflation not caused by a rapid recession, will cause other problems.
By bitcoin standards, the "deflationary spiral" that keeps mainstream economists up all night will become less common and serious. Similarly, money is a measurement system used by market participants to convey prices. When the central bank can print money out of thin air, change the reserve ratio and raise and lower interest rates to manipulate money, the measurement system will be distorted.
By creating a series of artificial market signals and manipulating credit prices, the inflationary money supply will lead to over leveraging and mismanaged investment.
The black line represents debt and the gray line represents productivity. From ray Dalio's "how economic machines work.".
When the rally ends, it will fall. Artificially stimulating the economy will lead to underinvestment and bubbles, and the bubble will eventually burst with obvious fluctuations.
Famous examples in history:
The Great Depression of the 1920s in the United States was triggered by artificially low interest rates and a huge wave of foreign bonds created by the central bank. This intervention led to an unsustainable credit crisis that eventually led to the great depression.
Japan's economic recession in the 1990s, during which years of loose monetary policy led to a sharp rise in asset prices, and finally Japan's market economy was in trouble. In just a few years, stocks have fallen by more than 63%, and many real estate markets have lost money as a result. Continued market intervention has led to decades of slow growth and rigidity in many Japanese companies.
The financial crisis in 2008 was also a deflationary crisis. The massive liquidity crunch completely frozen the credit market and pricing mechanism. This has been exacerbated by loose monetary policy and artificially low interest rates, as well as the collapse of highly leveraged Euro dollar deposits.
As ray Dalio points out in his large debt crisis case study,
"In many cases, monetary policy helps to expand the bubble rather than limit the bubble. This is especially true when inflation and growth are good and return on investment is high In this case, central banks focused on inflation and growth are often reluctant to tighten their currencies sufficiently. This is what happened in Japan in the late 1980s and in most parts of the world in the late 1920s and mid-2000s. "
Don't believe it?
To make matters worse, an inflationary currency also makes recovery more difficult after the crisis. Despite the collapse, authorities often intervene immediately to help businesses. Again, short-term aid undermines the long-term economy. As a result, long mismanaged zombie companies have struggled for decades in the recession.
Will bitcoin end these credit cycles? A stable monetary base will prevent man-made huge credit bubbles and the terrible consequences of deflation. Finally, the price of bitcoin will not fluctuate violently, but will smooth the credit cycle into natural interest rates and form a productive economic system._DJMINER
We believe that inflation represents a receding, silent tax - slowly shifting wealth from the ordinary to power.
However, in economics, although inflation is not a good thing, the opposite of deflation can also make the economy stagnate.
This article will discuss:
(1) discuss the basic concept of deflation;
(2) to solve the economists' worries about the falling price;
(3) the money supply of bitcoin is actually against deflation.
Bitcoin is not deflationary, its money supply is relatively constant
In financial terms, deflation and inflation are relative. We are familiar with inflation. In short, there are more currencies in the market. Relatively speaking, commodities are limited, and more currencies need to be "digested" per unit of commodity, thus causing inflation. Deflation, on the contrary, is characterized by insufficient money supply and downward price trend.
In this sense, bitcoin is not really deflation. The supply of bitcoin will not decrease, but will continue to increase until block rewards run out sometime around 2140. By then, bitcoin will have reached the theoretical ceiling of 21 million.
In the figure below, you can see the bitcoin release rate chart, which starts with relatively high inflation rate, and then gradually becomes stable over time, reaching the hard ceiling of 21 million coins.
In the long run, bitcoin is neither inflationary nor deflationary. Instead, it is programmed to end up with a constant amount of money without changing the supply.
"Even though the base is expected to remain the same, lost bitcoins are deflationary because they are actually money that disappears from the current supply," one would say
But also worry. As bitcoin security awareness and means become more and more professional, the loss of bitcoin will decrease with the passage of time. The highest bitcoin loss rate is only in the earliest period, which has eased after people realized its value. Therefore, as the supply of bitcoin approaches to zero, the situation of losing money will decrease, and finally reach a good balance.
Another view is: "although the supply of bitcoin may be constant, the population is growing. As a result, as more and more people buy a fixed amount of money, a rigid money supply will lead to deflationary pressures. "
This is also a wrong idea. In all cultures, population growth declines as societies experience urbanization and higher levels of education. As the regions with the highest population growth continue to industrialize, this downward pressure will continue into the future.
These are the latest UN estimates of population growth. It is predicted that the population will reach a balance by 2100. It's really ideal - the world's population level matches bitcoin output close to zero. Is this a coincidence or a design?
So literally, bitcoin is not deflationary. With a constant quantity, bitcoin will not exert any internal pressure on the price to rise or fall. It will serve as a pure basis for the price to fluctuate only according to the signals of market participants.
Address concerns about the fall in bitcoin prices
When people worry that bitcoin is "deflationary", they are actually worried that "deflation will bring down the price!"
Here are three main concerns:
The miners are angry at the fall in the yield on the currency standard.
The actual debt burden of bitcoin denominated loans is increasing.
The practice of saving money on the basis of currency is not investment, because there is no increase in earnings.
Many economists suggest that deflation is a disastrous economy that should be avoided in any case. Because in a period of rapid deflation, people expect commodity prices to fall, and people will store money to avoid spending it. This phenomenon has flooded the "lost decade" of Japan's economy because of stagflation after the collapse of demand.
The collapse of demand means that the purchasing power of currency continues to increase and the relative prices continue to fall. At this time, people are more willing to hoard money than to use it for purchase and consumption. As a result, the commodity is unsalable and the economy cannot develop, resulting in stagflation. At the same time, currency appreciation means that liabilities are also appreciating. The impact of liabilities such as personal loans and enterprise accounts payable is growing. On the one hand, it affects consumption capacity, and on the other hand, the bad debt rate is rising, which brings harm to social economy. So economists say the negative effects of deflation are terrible.
Bitcoin experts believe that deflation itself is not bad. To be more precise, we associate deflation with a collapse in demand because of a special case in the past (Japan). In the legal currency world, money is likely to be printed without restrictions, unless there is a complete collapse in demand and no willingness to issue money, so it is difficult for the economy to enter a stagflation period. The deflation of bitcoin is not caused by the collapse of demand. It follows a predetermined and controlled money supply model.
Or we can use bitcoin as a speculative object for short-term operation. And the legal currency still occupies the primary position in the minds of people in the contemporary society, with the US dollar, euro, RMB and other trading means as well as precious metals such as gold as the means of storing value. Therefore, bitcoin will not cause economic deflation of the whole society in the short term.
In fact, deflationary currency will make sellers consider the impact of discount, and it is easy to induce excessive hoarding instinct, unless the discount rate exceeds the buyer's hoarding instinct. Because both buyers and sellers have the motivation of hoarding, the two discount rates will reach a balanced price because the hoarding instinct of both sides offsets each other. So even if the discount rate of bitcoin price is 30%, most retailers who use bitcoin will not feel that it is difficult to spend bitcoin, so they can make profits. Of course, it remains to be seen whether bitcoin, a deflation not caused by a rapid recession, will cause other problems.
How bitcoin prevents systemic deflation
By bitcoin standards, the "deflationary spiral" that keeps mainstream economists up all night will become less common and serious. Similarly, money is a measurement system used by market participants to convey prices. When the central bank can print money out of thin air, change the reserve ratio and raise and lower interest rates to manipulate money, the measurement system will be distorted.
By creating a series of artificial market signals and manipulating credit prices, the inflationary money supply will lead to over leveraging and mismanaged investment.
The black line represents debt and the gray line represents productivity. From ray Dalio's "how economic machines work.".
When the rally ends, it will fall. Artificially stimulating the economy will lead to underinvestment and bubbles, and the bubble will eventually burst with obvious fluctuations.
Famous examples in history:
The Great Depression of the 1920s in the United States was triggered by artificially low interest rates and a huge wave of foreign bonds created by the central bank. This intervention led to an unsustainable credit crisis that eventually led to the great depression.
Japan's economic recession in the 1990s, during which years of loose monetary policy led to a sharp rise in asset prices, and finally Japan's market economy was in trouble. In just a few years, stocks have fallen by more than 63%, and many real estate markets have lost money as a result. Continued market intervention has led to decades of slow growth and rigidity in many Japanese companies.
The financial crisis in 2008 was also a deflationary crisis. The massive liquidity crunch completely frozen the credit market and pricing mechanism. This has been exacerbated by loose monetary policy and artificially low interest rates, as well as the collapse of highly leveraged Euro dollar deposits.
As ray Dalio points out in his large debt crisis case study,
"In many cases, monetary policy helps to expand the bubble rather than limit the bubble. This is especially true when inflation and growth are good and return on investment is high In this case, central banks focused on inflation and growth are often reluctant to tighten their currencies sufficiently. This is what happened in Japan in the late 1980s and in most parts of the world in the late 1920s and mid-2000s. "
Don't believe it?
To make matters worse, an inflationary currency also makes recovery more difficult after the crisis. Despite the collapse, authorities often intervene immediately to help businesses. Again, short-term aid undermines the long-term economy. As a result, long mismanaged zombie companies have struggled for decades in the recession.
Will bitcoin end these credit cycles? A stable monetary base will prevent man-made huge credit bubbles and the terrible consequences of deflation. Finally, the price of bitcoin will not fluctuate violently, but will smooth the credit cycle into natural interest rates and form a productive economic system._DJMINER
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