What does deflationary really mean and why is it so important?


With the upcoming merge of Ethereum to proof of stake there’s a lot of talk about how it *may* become deflationary, like Bitcoin.

Why is this important? Most things in this world are not deflationary. More money gets printed every day. More gold is discovered and dug up every week.

I can’t think of an asset class that is truly deflationary, so what’s the big deal?

In: 3

the danger (which a lot of bitcoin advocates say isn’t real, for various reasons, i have no idea, just stating the principle) is that a feedback loop occurs between a few deflationary practices. people hoarding in anticipation of increased value will reduce the supply, which will further increase deflation, plus since bitcoin is infinitely divisible then storefronts, wages, etc. that use bitcoin will also use smaller and smaller amounts of bitcoin, which also reduces the supply in circulation.

i think there’s some other things as well that can do it, but the point is they all occur in reaction to people perceiving deflation in bitcoin’s value, and they all also cause deflation. basically hyperinflation in reverse, a feedback loop that exponentially increases the value of a coin while exponentially reducing the volume of coins in circulation, until the currency is unusable.

unlike other assets and currencies, there’s no real way to increase the supply of bitcoin. there’s a hard limit to the number that can exist. and realistically that limit’s a lot lower since it’s possible for coins to be irretrievably lost.

You don’t want a form of money to be deflationary, because in order for money to do the things that we like money to do, you need to encourage people to spend it. If it’s deflationary, then it’ll always be worth more tomorrow then today, which ends up discouraging people from using it.

If you’re treating the coins as an investment, then w/e, but if you actually are part of the crypto fans that genuinely want crypto to be a real currency, it’s an immense problem.