In macroeconomic terms, deflation usually accompanies a contraction in monetary supply. However, prices can decline for a wide range of reasons — including low levels of productivity in the economy, advances in technology, or simply lower levels of demand.
In the context of Bitcoin, deflation tends to refer to the cryptocurrency's maximum supply. There will only ever be 21 million Bitcoins mined — and at this point, no new coins will be created, and no more block rewards will be given.
In fact, the circulating supply of BTC will reduce over time as private keys are lost and coins become unrecoverable. Many other cryptocurrencies are also deflationary in nature.
Deflationary currency systems are very unusual in economic history — in fact, cryptocurrencies probably represent the first example of such an approach. Economists are interested in deflationary systems for exactly this reason, and some believe that crypto's deflationary nature will completely revolutionize our approach to money. Others, however, are skeptical, believing that a deflationary currency system will inevitably result in hoarding and liquidity problems.
The Bitcoin community has always been preoccupied with the impact of a deflationary system. For those who wish for the currency to become a widespread means of exchange (as opposed to pure speculation), concerns about deflation are tied up with conversations on subdivisions of Bitcoin (such as into bits.) Proponents believe that Bitcoin's theoretical infinite divisibility will help to solve potential problems associated with deflation.
Furthermore, some believe that the problem is in fact not with the deflationary nature of crypto, but with the inflationary nature of fiat currencies. These people tend to suggest that prices will naturally fall in the Bitcoin economy through increases in innovation and productivity, but that a deflationary spiral would not occur because Bitcoin is not based on theoretical loans but on a real and finite monetary supply.
Related Articles
Crypto Invoicing
Crypto invoicing allows you to create different itemized bills and invoices for the products or services you offer. It enables you to bill clients in crypto via email, without the hassle of switching between wallets and apps. As cryptocurrencies ...
Crypto Debit Card
A crypto debit card is a type of debit card that allows its holder to pay for goods and services using cryptocurrencies like Bitcoin (BTC), Litecoin (LTC) and Ethereum (ETH). Most crypto debit cards in use today are powered by Visa and MasterCard, ...
Crypto Address
A crypto address is a string of characters that represents a wallet that can send and receive cryptocurrency. It is akin to a real-life address, email or website. Every address is unique and denotes the location of a wallet on the blockchain. Most ...
Cryptojacking
Some cryptocurrencies are mineable, meaning that people can choose to expend their computational resources to secure the operation of the blockchain and earn newly created coins in exchange; the coins can later be traded on crypto exchanges for ...
Cryptoasset
Cryptoassets leverage cryptography, consensus algorithms, distributed ledgers, peer-to-peer technology and/or smart contracts to function as a store of value, medium of exchange, unit of account, or decentralized application (DApp). There are four ...