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Author Topic: Deflation and Bitcoin, the last word on this forum  (Read 128428 times)
thomiel
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July 06, 2011, 04:36:20 AM
 #121

In my opinion, the point Andrew Vorobyov brought in, cannot be overemphasized: Without inflation, people don't invest. Bitcoin isn't really the electronic version of cash money. It rather is a kind of electronic gold (as the term 'mining' for the money creation process suggests). Indeed it could be a very good means of exchange, but as a replacement for a 'currency', it lacks an inflation mechanism.

I know, by now you probably are about to reply with the usual 'but inflation is bad' / 'you are wrong here' / 'just don't use bitcoin' / 'you misunderstood bitcoin' / 'go away, evil Keynesian thug' phrases -- or just ignore me. But don't get me wrong: I am quite enthusiastic about the idea behind bitcoin, the decentralized architecture and so. But right now, bitcoin merely makes a good gold substitute: people are eager to speculate with it, hoard it, but spending it for real goods and services seems to be a miniscule application of the system despite the obvious benefits. So why is that?

If bitcoin is ever to replace real currency, it needs to implement an inflation mechanism beyond the one currently implemented to reward the creation of new blocks: It has to be one that distributes new coins more equally around the peers than with the current algorithm which just prefers users with mining rigs. Maybe a combination of CPU/GPU/FPU power and another sparse resource like IPv4 addresses. As a side effect, the acceptance of the new currency can be further enhanced.

Without an inflation mechanism, bitcoin is doomed to stay in the bubble state, waiting to burst and see $/€-Exchange rates that will only stabilize at rates where idealists like me are still willing to trade real goods for it. Only exchange for goods can stabilize the exchange rates. And goods will only be produced, if investments in their production is more profitable than hoarding. A bitcoin v0.4, or maybe rename it to bitfiat or so, could initially be coupled to bitcoin v0.3 somehow to inherit the trust it earned and -- just like the national currencies -- liberate itself from its hoarding roots and develop its exchange value to the fullest.

I'm well aware that I'm posting in a forum that is dominated by miners and speculators and so I really can understand the reluctance to depart from the deflation model that is so accessible to the common sense. Maybe it's inevitable in this early stage to just focus on the creation of trust. But for the sake of bitcoin's full potential, I hope the community finds a way to let it evolve before the burst without losing trust in bitcoin because of the patch. Smooth inflation by algorithm is really better than by a bursting bubble which would leave bitcoin to live a niche existence among other projects.

One scenario I can imagine is: There will be a bunch of forks soon, which resemble state currencies and rely on bitcoin as 'gold'. They can be exchanged for one another with different rates depending on the 'fiscal politics' of the respective group (which will be connected to strategies to get p2p emoney into the production process). Divide and rule...

Anyhow, trying to ban questions that address social sciences from the forum, I think, is a tactics with limited range.
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Transactions can optionally carry transaction fees. Whoever mines the block which ends up containing your transaction will get the fee. The Bitcoin client will sometimes force you to pay a fee when it thinks that no miner will accept your transaction otherwise.
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MtRev
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July 06, 2011, 05:00:49 AM
 #122

I just don't see why this is such a big deal. When the price drops, buy some more, when the price rises, sell for profit and keep doing it. Who cares if its deflation or not, either way you make money from it.

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thomiel
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July 06, 2011, 05:46:30 AM
 #123

My point: Bitcoin is rather subject to speculation than being anything else -- speculation in the possibility that it can be a major money transfer system in the future trusted by millions of people, in which case your hoarded BTCs will sky-rocket. That is the only value bitcoin is built upon right now (apart from the nerdy fun of the whole concept). The question is: how can it become a major money transfer system, or in other words: a currency? If it fails in doing so, your coins are lost (on the long run -- but defenitely before you are dead). I was going to point out that it lacks a mechanism that supports sane inflation.

Let me ask back: Looking at any well working currency system on the world, why is it that it's seems not possible to afford not to imply a decent inflation rate?

To help you understand: What would you do, if you knew, 10% of the bitcoins in your wallet would vanish each year and you are not able to use rate changes to speculate & compensate because the rates are stable? You would rather spend your bitcoins than seeing it vaporize, wouldn't you? Maybe in operations to get more bitcoins back than you have spent. So only your spending and working with the money avoids the economy from depression, because you create use value, so wealth in the society is maintained. Of course, it's better to increase the overall amount of money (thus equalizing the difference between hoarders and exchangers) rather than to take away money from hoarders. Inflation is an incentive to work, not to hoard. And work holds society together. Get the picture?
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July 06, 2011, 06:02:41 AM
 #124

What if BitCoin was created by Google Inc.?  Would you still think BitCoin would die out in our life time? You're right, it is what we make of it, but I think it's too early to tell the future of BitCoin. It really looks like people love the concept of bitCoin and how it works. I mean look at eGold, they never got as popular as BitCoin and they were backed by the value of actual gold. And yet, BitCoin is making noise all over the media, way more coverage then eGold when their data center got robbed.

Even google making an online wallet for BitCoin. They also believe this is going to be the next big thing, otherwise they wouldn't even spend time on it. I'm not saying anything that google touches will turn to gold, but they do have a good track record.  Digital currency may very well be the way of the future.

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July 06, 2011, 06:14:58 AM
 #125

My point: Bitcoin is rather subject to speculation than being anything else -- speculation in the possibility that it can be a major money transfer system in the future trusted by millions of people, in which case your hoarded BTCs will sky-rocket. That is the only value bitcoin is built upon right now (apart from the nerdy fun of the whole concept). The question is: how can it become a major money transfer system, or in other words: a currency? If it fails in doing so, your coins are lost (on the long run -- but defenitely before you are dead). I was going to point out that it lacks a mechanism that supports sane inflation.

Let me ask back: Looking at any well working currency system on the world, why is it that it's seems not possible to afford not to imply a decent inflation rate?

To help you understand: What would you do, if you knew, 10% of the bitcoins in your wallet would vanish each year and you are not able to use rate changes to speculate & compensate because the rates are stable? You would rather spend your bitcoins than seeing it vaporize, wouldn't you? Maybe in operations to get more bitcoins back than you have spent. So only your spending and working with the money avoids the economy from depression, because you create use value, so wealth in the society is maintained. Of course, it's better to increase the overall amount of money (thus equalizing the difference between hoarders and exchangers) rather than to take away money from hoarders. Inflation is an incentive to work, not to hoard. And work holds society together. Get the picture?

There are certain benefits to inflation, no doubt.  However, BTC was designed the way it was designed, namely, to only have limited amount of it, period.  That's one of the things that some people value about it (and others don't).  Having the properties that it has (decentralization, limited amount, relative anonymity, etc) it's become an asset class of its own.  Some people value real estate, some value dollars, some value euros, some gold, etc.  Some like the properties of bitcoin.  I am willing to bet that the majority of people like all of them combined, hence, these asset classes can and do co-exist.  No one is stopping anyone else from creating an inflating, decentralized coin, let's call it IDCoin. Smiley   I imagine IDCoin and Bitcoin would complement one another quite nicely, as long as they are both decentralized I'm OK with both.

thomiel
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July 06, 2011, 06:27:58 AM
 #126

MtRev: Agreed. But you just addressed the both values bitcoin currently possesses: the conceptual one for nerds and the one for speculators -- maybe both of them multiplied to explain the impact. How and if it's going to lift off depends on decisions made by the community (or on behalf of the community by the development team). Evolution does not care about the feelings of some speculators and miners. Question remains: How do we make more of it?

PS/OT: Google & p2p? You are kidding!
TierNolan
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July 06, 2011, 08:45:21 AM
 #127

I think people underestimate "menu costs".

It is hard for people to "think in bitcoins" for a currency that deflates at the rate that bitcoins are deflating. 

The number in the price should represent value rather than amount of the underlying asset.

You could still have bitcoins themselves deflating, but be able to give prices in "reference coins" or something.

If you pay 10 reference coins, your client would automatically show the bitcoins total and would actually send the bitcoins.

If you left your wallet alone, then the number of reference coins would increase over time.

Having bitcoins be the gold standard rather than the currency itself seems like a reasonable compromise.

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JoelKatz
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July 06, 2011, 10:50:08 AM
 #128

Without inflation, people don't invest.
That's simply incorrect. Inflation neither incentivizes nor disincentivizes investment. The mistake comes from ignoring the fact that the expected future performance of a commodity or currency is built into its current price.

For example, say we all knew that Neutronium would sell for $5,000/oz next year. And say you had some Neutronium. Would you wait to sell it? There would be no point, because the price of Neutronium today would immediately be bid up to close to $5,000/oz. So the future value of Neutronium would not detract from your willingness to sell the Neutronium today versus holding it to wait for its value to increase.

If Neutronium was going to increase in value and you had some, you could sell the right to hold the Neutronium as it increases for its fair market value. Or you could hold the Neutronium and get its fair market value. Either way, you get the same thing. So the expected future high price is no reason not to sell the Neutronium today.

The same applies with bitcoins. If we all know their value is going to increase, then the today price will include the value of that increase. If you want that increase in the future, you can just wait. But if you want it now, you can sell/invest. If you hold bitcoins, you will get their increase in value, but you could get that today by selling them. You lose any additional advantage of investing.

Holding currency has precisely the same disadvantage in either an inflationary or a deflationary economy -- you lose the additional value a wise investment could bring.

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TierNolan
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July 06, 2011, 12:17:00 PM
 #129

Holding currency has precisely the same disadvantage in either an inflationary or a deflationary economy -- you lose the additional value a wise investment could bring.

Right, in the long run, bitcoins should increase at the average market rate of return.  That assumes efficient markets, which if things are stable will be reasonable.  There isn't enough liquidity and also people aren't sure it will work.


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JoelKatz
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July 06, 2011, 12:57:51 PM
 #130

Holding currency has precisely the same disadvantage in either an inflationary or a deflationary economy -- you lose the additional value a wise investment could bring.
Right, in the long run, bitcoins should increase at the average market rate of return.  That assumes efficient markets, which if things are stable will be reasonable.  There isn't enough liquidity and also people aren't sure it will work.
Exactly. One of the main factors influencing the price of bitcoins today is people's uncertainty about how stable the bitcoin system will prove to be over time. Even if you think a cryptocurrency is a sure thing, it may not be bitcoin.

The deflation is meaningless. Predictable inflation and predictable deflation just get priced in.

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MoonShadow
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July 06, 2011, 03:05:40 PM
 #131


The deflation is meaningless. Predictable inflation and predictable deflation just get priced in.


This is true, but the highly predictable nature of Bitcoin (it's not deflationary) is an attractor for early adopters and long term speculators.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
thomiel
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July 06, 2011, 04:24:58 PM
 #132

Without inflation, people don't invest.
That's simply incorrect. Inflation neither incentivizes nor disincentivizes investment.

Hmm. I think we live on different planets then.

Not investing has two big benefit for hoarders: No risk to lose the invested money. No work involved to care about how the money is used.
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July 06, 2011, 09:55:08 PM
 #133

Without inflation, people don't invest.
That's simply incorrect. Inflation neither incentivizes nor disincentivizes investment.

Hmm. I think we live on different planets then.

Not investing has two big benefit for hoarders: No risk to lose the invested money. No work involved to care about how the money is used.
Right, but that works the same whether the currency inflates or deflates. In either case, if you don't invest you don't have to work to care about how the money is used and you have no risk to lose the money. If you do invest, you have the potential for a better rate of return and you have risk.

The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.

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July 06, 2011, 10:59:12 PM
 #134


The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.


Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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July 06, 2011, 11:34:36 PM
 #135


The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.


Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

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July 06, 2011, 11:48:11 PM
 #136


The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.


Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
serchanto
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July 06, 2011, 11:58:31 PM
 #137


The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.


Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

I would disagree with this definition.   Deflation is the reduction of the general level of prices in an economy, it has nothing to do with the base of BTC, just how much things cost in BTC.  So, if the base stays the same (21M BTC) and a widget goes down in price from 1BTC to 0.1BTC because more people find value in BTC, we have deflation.

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July 07, 2011, 01:00:05 AM
 #138


The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.


Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

I would disagree with this definition.   Deflation is the reduction of the general level of prices in an economy, it has nothing to do with the base of BTC, just how much things cost in BTC.  So, if the base stays the same (21M BTC) and a widget goes down in price from 1BTC to 0.1BTC because more people find value in BTC, we have deflation.

Changes in the general prices are symtoms, not the causes, of deflation and inflation.  In the case of Bitcoin's high inflation rate, that symtom is overwelmed by other factors.  Words have specific meanings within certain contexts, and withing the context of Economics deflation and inflation only have meaning at all in relation to the decrease and increase in the monetary base.  There is no other way to define them with any useful precision.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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July 07, 2011, 01:53:52 AM
 #139


The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.


Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

I would disagree with this definition.   Deflation is the reduction of the general level of prices in an economy, it has nothing to do with the base of BTC, just how much things cost in BTC.  So, if the base stays the same (21M BTC) and a widget goes down in price from 1BTC to 0.1BTC because more people find value in BTC, we have deflation.

Changes in the general prices are symtoms, not the causes, of deflation and inflation.  In the case of Bitcoin's high inflation rate, that symtom is overwelmed by other factors.  Words have specific meanings within certain contexts, and withing the context of Economics deflation and inflation only have meaning at all in relation to the decrease and increase in the monetary base.  There is no other way to define them with any useful precision.

Change is price is neither a symptom nor a cause of inflation/deflation.  It'd the definition of both.  Increase in price = inflation.  Decrease in price = deflation.  That's the definition of these two concepts, regardless of context.  When prices of goods denominated in BTC fall (i.e. it takes fewer BTCs to buy something) deflation occurs. 

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July 07, 2011, 01:56:38 AM
 #140


The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.


Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

I would disagree with this definition.   Deflation is the reduction of the general level of prices in an economy, it has nothing to do with the base of BTC, just how much things cost in BTC.  So, if the base stays the same (21M BTC) and a widget goes down in price from 1BTC to 0.1BTC because more people find value in BTC, we have deflation.

Changes in the general prices are symtoms, not the causes, of deflation and inflation.  In the case of Bitcoin's high inflation rate, that symtom is overwelmed by other factors.  Words have specific meanings within certain contexts, and withing the context of Economics deflation and inflation only have meaning at all in relation to the decrease and increase in the monetary base.  There is no other way to define them with any useful precision.

Change is price is neither a symptom nor a cause of inflation/deflation.  It'd the definition of both.  Increase in price = inflation.  Decrease in price = deflation.  That's the definition of these two concepts, regardless of context.  When prices of goods denominated in BTC fall (i.e. it takes fewer BTCs to buy something) deflation occurs. 

<sigh>

Please take some time and read an Economics textbook.  The definition that the news media presents is not the Economic definition.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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