Bitcoin Forum

I have read that one of the chief benefits of bitcoin is that due to it's fixed quantity it is immune to inflation as governments cannot "make" more of them.

Is this really true?  What is to stop say the American government making a bitdollar, pinning the price against the bitcoin and forcing is acceptance as legal tender?  Surely this would effectively deflate the value of a bitcoin?

because the government can't force people to accept its own version of bitcoin.

this. sort of.

They could give people an offer they cant refuse. They are great at that.

But it can force any registered entity to accept them like shops, banks etc

i would think that fiat currency's strength is based on consumer confidence. if the government were to force businesses into accepting its own cryptocurrencies, a lot of people would be pissed off and alarmed. the backlash wouldn't be worth the risk... especially considering that it would still probably be volatile (maybe not as bad as BTC though).

Gresham's Law will kick in and as more "bit dollars" are printed, bitcoins will become more valuable than "bitdollars". While a "bitdollar" might be officially worth 1 bitcoin, nobody would trade them 1 for 1.

The government cannot force anyone to accept a given price for bitcoins. That is the equivalent of the government setting the global price of gold, which is impossible, but even more difficult as bitcoins are anonymous and transactions are even harder to track. This scenario could never happen.

Bitcoin is global. The US is not, even if a lot of insulated Americans have difficulty understanding that.

It is not the insulated Americans that have difficulty understanding that the US is not the only pebble on the beach, it is the dollar that is much more global than Bitcoin is and probably will ever be...

Does bitcoin contain features that make it a deflationary currency? Yes
This means that if Bitcoin was the only form of global exchange , and assuming that the global economy continued to grow then 1 Bitcoin would buy more goods next year than it does today. 
So to maintain purchasing power one must spend bitcoin (if I do not my purchasing power increases)

If the global economy is shrinking, then one bitcoin will acquire less goods next year than it will now so to maintain purchasing power I must hoard bitcoin, not spend.  -> negative feedback loop

A world where people buy what they need, not simply what they want, might not be such a bad one.

Except a bitcoin or any currency is only worth as much as the goods you'll get for it. All the theoretical banked money is nice and all, but unless you buy stuff with it, you might as well have nothing at all. No matter how deflationary a currency is, eventually people will buy stuff. Because it's stuff that people really want, and currency is just a medium of exchange.

The problem with such logic is that people won't be able to buy stuff they finally decided to buy because by that time there are no more producers to make what they are going to buy. Deflation is damaging to producers in the first place...

This is exactly what happens in China, the CNY is effectively pegged against the USD.

My point is more about the actual immunity to inflation that bitcoin is supposed to have rather than government control.  Bitcoin is open source and any alt coin that gets significant traction is going to dilute the digital money pool, thus leading to inflation.  The immunity to inflation assumes that there is a fixed supply of currency, but as anyone can make a new currency then surely the theoretical possibility for inflation is actually infinite.

TIL Bitcoin was built on the premise that it magically prevents inflation of other currencies.

Your missing the point, if there is another currency that has pretty much the same function as bitcoin and has widespread use then a bitcoin becomes less valuable.  Bitcoin is not insulated from outside factors.

If you mean by inflation of other currencies their depreciation (i.e. decline in the purchasing power), then in reality Bitcoin will contribute to this instead of preventing. And where did you really get the notion that Bitcoin had been actually built on such premises (even if they are wrong)?

The idea is that btc will appreciate in purchasing power terms versus other fiat currencies

In that sense it is deflationary and not imlationary

It has inflationary (depreciating) effect on other currencies, meaning their purchasing power will be decreasing as long as it drives them out of circulation...

Most people pin Bitcoin to their own fiat currency price, so it's not immune in this way.

Alt cryptos are Bitcoin's inflation.

The bitcoin money supply can be extended by debt. Currently, debt is may be 90 % of the dollar money supply, notes and coins 10%. Probably, debt will play a lesser role in a bitcoin only economy.

bitcoins are immune to M0/MB inflation, meaning that the money supply itself does not inflate, except at the very beginning (which we're still in) while the original 21 million BTC get distributed via the mining process. Once 21 million coins exist, they become deflationary since no new coins are issued and, as naturally occurs, money falls out of circulation as wallets are lost.

Bitcoin could still suffer the kinds of inflation most currencies see in M1/M2/M3/MZM such as fractional-reserve banking, but the idea of a publicly published block chain is that at any moment it should be trivial to audit a bank and ensure their deposits are correctly recorded. Essentially, any institution practicing fractional reserve banking should be much easier to spot and those who dislike such practices can more easily walk away from them. There are complications to this model, but that's the ideal anyway.

Luckily the amount of inflation due to fractional reserve is limited. Assuming the reserve ratio is 10%, we can expect the M1 to reach a limit of around 210 million BTC and go no higher.

Situation described in the OP would cause more problems for the dollar than it would for bitcoin.

It's not possible right now, too many other countries hold various dollar denominated assets. They'd be a pretty pissed off with the US if they did this suddenly without consulting, and if they did consult, it would turn into an ugly haggling situation (I think it's fair to say that everyone has something to lose from most of the possible deals that could be cut)