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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 523166 times)
KrLos
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November 17, 2017, 04:47:42 AM
 #861

Good explanation about bitcoin in terms of inflation and deflation.
If the money supply expands, we get inflation, if it contracts, we get deflation. Everything is simple





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November 17, 2017, 10:47:00 AM
 #862

An area dedicated to discussing the differences of these two terms and the theories supporting them.

I'm looking forward to an in-depth discussion on the subject! I've noticed that confusion between the two seems to come up quite a bit on the forum, and thought it may be reasonable to dedicate a thread on the matter.

Pulled from a discussion in Wall Observer



Price-Deflation is what you are used to hearing about in Bitcoin. That term is used to describe the prices of goods/services as they decrease, because the value of Bitcoin goes up.

Price-Inflation is the opposite. When prices of goods/services increase because the value of Bitcoin goes down.

So, when dealing with Price-Inflation or Deflation, there is an inverse relationship of price and value, in regard to goods/services and Bitcoin.

Example: As the Bitcoin price goes from $10 to $20, the prices of goods/services goes down from 20BTC to 10BTC. As the Bitcoin price goes from $20 to $10, the prices of goods/services goes from 10BTC to 20BTC!

Why does the price of Bitcoin go up and down? The price of BTC goes up and down based on the exchange rate, or market price, which is set by buyers and sellers, or traders. They directly trade the Bitcoin currency with all sorts of other currency, and even some with gold; the most popular being the USD (US dollar). They set the price when executing orders to buy or sell. I will get into the actual reason of why the price fluctuates in the last section.



Now that we've gone over PRICE Inflation and Deflation (which honestly, to me, is a term made popular by Keynesian's to hide the real facts, as price inflation/deflation is simply the market exchange rate, reflective of the money supply into a currency from itself and other currencies), let's go over the REAL inflation/deflation of a currency (otherwise known by many as Monetary Inflation).

MoneySupply-Inflation is when the value of Bitcoin decreases when the total supply of Bitcoin increases. In our current state, this is at a generation rate of 25 BTC every 10 minutes.

MoneySupply-Deflation will essentially never occur. It is when the value of Bitcoin increases when the total supply of Bitcoin decreases. This may happen, say, when someone loses their private key and all the BTC associated with it are lost. This effectively "makes the rest of us richer". That being said, there is a SET DECREASE in the generation rate of BTC, so you have sort of a "deflationary effect" in the value, as long as more exchange occurs for BTC at a rate which is faster than that set generation rate.

When all 21 million coins are produced, the MoneySupply will be neutral, and the value will continue to increase (prices will decrease, consequently), as long as people continue to exchange in BTC.

This leads me to the last section.



What determines the PRICE of Bitcoin? The VALUE of Bitcoin at a particular moment.

What determines the VALUE of Bitcoin? The SUPPLY and DEMAND of Bitcoin in the economy.

What determines the SUPPLY of Bitcoin? Currently, the MoneySupply-Inflation rate of 25 BTC every 10 minutes, and traders willing to SELL Bitcoin to BUYERS in exchange for other supplies of money (currencies).

What determines the DEMAND of Bitcoin? Traders willing to BUY Bitcoin from SELLERS in exchange for other currencies.


Therefore: BUYERS, SELLERS, and MONEYSUPPLY-INFLATION (miners) determine the VALUE of Bitcoin, which determines the PRICE of BTC as BUYERS and SELLERS trade based on that VALUE (or supply and demand) of Bitcoin.


We don't exactly know the totality of the supply and demand. Sure, we could try and aggregate data from all the exchanges, but we will never be accurate as there are exchanges which can not be accounted for (OTC). The cool thing is that we DO know the MoneySupply rate, and we DO know the exchange rate. From this, we can determine a real value of Bitcoin when simply multiplying the two factors; a sort of inflation-adjusted view of the currency.

Effectively, the quantitative analysis of supply and demand is really what the currency exchange traders attempt to accurately determine which is conveyed through buying and selling of Bitcoin, setting a VALUE via the PRICED exchange rate of the currency. On a side note, most of the big Market Makers (FX Traders) use this price movement as a way to make a profitable living, as well. Especially when price fluctuations are a consequence of hype or fear (bubbles, cliffs), not factual supply/demand data, and are wildly out of the real price range.

Thus, if you analyze the proper macroeconomic data in an attempt to forecast future DEMAND for more Bitcoin (price increase), you will realize some very interesting things, and have a more accurate picture of where the price is going...

Happy trading! Wink
having an inflation and deflation in terms btc or any kind of bussiness is nirmal when it comes in term of economical state.It will be able that currency may increases or decreases,but btc can assure that btc currency price can increase nowadays to future.
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November 17, 2017, 11:47:32 AM
 #863

Is price-inflation always bad for the economy? Are BTC price and exchange rates in the country connected?
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November 17, 2017, 02:21:51 PM
 #864

That pretty simple. 21mil total amount - 7billions people. The more people in there, the more btc cost.
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November 18, 2017, 11:21:32 AM
 #865

I like how the others are very detailed on explaining the defiation and inflation and how it is relative to bitcoin. I have more to learn so these information really helps.

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November 18, 2017, 02:04:29 PM
 #866

An excellent post that I'll sticky so people can learn from.
In my own understanding about inflation and deflation of market supply, the inflation is a broad chage in price products or derease the value of money because the market supply increases and in deflation is also a broad change in price of products or increase the value of money because the market supply decrease.

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November 19, 2017, 06:00:55 PM
 #867

Strong support and resistance for $btc but its enough, it will dump if it break first 6200- 6000 then go down 5600-5400. It seems like money flowing out of $BTC isn't going into Bcash anymore. Now it's $ETH's and other $ALT's turn.
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November 19, 2017, 11:27:05 PM
 #868

Very interesting post, may be one of the most important for newbie here latelty... Bu to be honest i have seen few posts like your and found them quite  similar. But it doesn't matter the clue and the whole meanning was approved. I really hope to see much more posts like yours.
The Bitcoin deflation lately is very strong, and getting much more power. It is good for investors but not for shopping, fees etc.

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November 20, 2017, 01:46:56 PM
 #869

Yes , money supply and demand is determined inflation or deflation, ok. But I think short term jump and dump will feed money rising like stairs. For example  Bitcoin cash fork and then Bitcoin increased more..
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November 21, 2017, 08:31:18 AM
 #870

Thank you for this information. Now I know when will the value of bitcoinBTC will rise up and when it will go down..
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November 22, 2017, 05:01:50 PM
 #871

Also, if we are talking about currency - the world rates of any currency (aswell crypto) may depend on authoritative news and reviews of this or that currency. If there is a discussion of currency on authoritative sources and this news becomes loud - it can affect the actions of many people, so the rate may fall or rise.
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November 23, 2017, 05:17:05 PM
 #872

Just read the CFV-Modell from pablomp, who is the new Mises.

https://steemit.com/bitcoin/@pablomp/cryptocurrencies-what-is-the-fair-value-of-a-currency

so all your questions should be answered now ^^

if not just ask me .
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November 23, 2017, 05:30:52 PM
 #873

the inflation when the prices goes up without any balance which badly effect the economy in the inflation the value of money falls and the other currencies values become high while in the deflation the case is opposite for money the money supply become less in the economy and the money stick to few hands like in the hands of capitalist people.

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November 24, 2017, 11:42:14 AM
 #874

Hey all,

I’m conducting a research on cryptocurrencies and I’m especially interested in why people choose Bitcoin. And since you are bitcoin users/experts, I thought you would be the best people to ask. It would be great if you could take the time to answer my questions (anonymously), I promise it will take no more than 10 minutes.

Click on the following link to go to the survey - https://uvacommscience.eu.qualtrics.com/jfe/form/SV_3lzs2sI13cKH1m5?source=bitcointalk

If you are interested, I could post my main findings here.

Thank you
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November 25, 2017, 12:57:50 AM
 #875

Asset backed currencies have been the ONLY succesful models tried. They stood for centuries, none ever "failed" they were all replaced by fiat systems.
The dollar was removed from gold backing in 1971, but it was weaned from gold onto oil and the "petrodollar" was formed, it was a brilliant plan and when put forth to Saudi "leaders" they realised that if they got in on the ground floor of the pyramid scheme they would greatly benefit.
Fiat moneys have ALWAYS failed. The ability to "print your way out of trouble" is in fact "printing your way into trouble" and will always end bad for the users (good for the bankers).
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November 25, 2017, 12:10:54 PM
 #876

MoneySupply-Inflation is when the value of Bitcoin decreases when the total supply of Bitcoin increases. In our current state, this is at a generation rate of 25 BTC every 10 minutes.

MoneySupply-Deflation will essentially never occur. It is when the value of Bitcoin increases when the total supply of Bitcoin decreases. This may happen, say, when someone loses their private key and all the BTC associated with it are lost. This effectively "makes the rest of us richer". That being said, there is a SET DECREASE in the generation rate of BTC, so you have sort of a "deflationary effect" in the value, as long as more exchange occurs for BTC at a rate which is faster than that set generation rate.

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November 26, 2017, 02:11:51 AM
 #877

You have to stop a bit a consider trustworthiness. You can not have it, neither in real money regard nor costs. In case you by some methods make sense of how to do the abnormal regardless of its trouble, you pick up the structure static and no ground is possible, and you in like manner murder all danger. The wiping out of risk, without any other person changes the structure. So it is doubly unfathomable.

It takes after fishballs in white sauce. If you crush one down, another flies up. The best (and as consistent as you get) is to just leave everything drifting.
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November 26, 2017, 12:20:56 PM
 #878

To understand inflation and deflation its key to read the following:

https://mises.org/library/theory-money-and-credit

there is no need of big discussion about it, if you just read this. ^^
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November 27, 2017, 05:23:06 AM
 #879

An area dedicated to discussing the differences of these two terms and the theories supporting them.

I'm looking forward to an in-depth discussion on the subject! I've noticed that confusion between the two seems to come up quite a bit on the forum, and thought it may be reasonable to dedicate a thread on the matter.

Pulled from a discussion in Wall Observer



Price-Deflation is what you are used to hearing about in Bitcoin. That term is used to describe the prices of goods/services as they decrease, because the value of Bitcoin goes up.

Price-Inflation is the opposite. When prices of goods/services increase because the value of Bitcoin goes down.

So, when dealing with Price-Inflation or Deflation, there is an inverse relationship of price and value, in regard to goods/services and Bitcoin.

Example: As the Bitcoin price goes from $10 to $20, the prices of goods/services goes down from 20BTC to 10BTC. As the Bitcoin price goes from $20 to $10, the prices of goods/services goes from 10BTC to 20BTC!

Why does the price of Bitcoin go up and down? The price of BTC goes up and down based on the exchange rate, or market price, which is set by buyers and sellers, or traders. They directly trade the Bitcoin currency with all sorts of other currency, and even some with gold; the most popular being the USD (US dollar). They set the price when executing orders to buy or sell. I will get into the actual reason of why the price fluctuates in the last section.



Now that we've gone over PRICE Inflation and Deflation (which honestly, to me, is a term made popular by Keynesian's to hide the real facts, as price inflation/deflation is simply the market exchange rate, reflective of the money supply into a currency from itself and other currencies), let's go over the REAL inflation/deflation of a currency (otherwise known by many as Monetary Inflation).

MoneySupply-Inflation is when the value of Bitcoin decreases when the total supply of Bitcoin increases. In our current state, this is at a generation rate of 25 BTC every 10 minutes.

MoneySupply-Deflation will essentially never occur. It is when the value of Bitcoin increases when the total supply of Bitcoin decreases. This may happen, say, when someone loses their private key and all the BTC associated with it are lost. This effectively "makes the rest of us richer". That being said, there is a SET DECREASE in the generation rate of BTC, so you have sort of a "deflationary effect" in the value, as long as more exchange occurs for BTC at a rate which is faster than that set generation rate.

When all 21 million coins are produced, the MoneySupply will be neutral, and the value will continue to increase (prices will decrease, consequently), as long as people continue to exchange in BTC.

This leads me to the last section.



What determines the PRICE of Bitcoin? The VALUE of Bitcoin at a particular moment.

What determines the VALUE of Bitcoin? The SUPPLY and DEMAND of Bitcoin in the economy.

What determines the SUPPLY of Bitcoin? Currently, the MoneySupply-Inflation rate of 25 BTC every 10 minutes, and traders willing to SELL Bitcoin to BUYERS in exchange for other supplies of money (currencies).

What determines the DEMAND of Bitcoin? Traders willing to BUY Bitcoin from SELLERS in exchange for other currencies.


Therefore: BUYERS, SELLERS, and MONEYSUPPLY-INFLATION (miners) determine the VALUE of Bitcoin, which determines the PRICE of BTC as BUYERS and SELLERS trade based on that VALUE (or supply and demand) of Bitcoin.


We don't exactly know the totality of the supply and demand. Sure, we could try and aggregate data from all the exchanges, but we will never be accurate as there are exchanges which can not be accounted for (OTC). The cool thing is that we DO know the MoneySupply rate, and we DO know the exchange rate. From this, we can determine a real value of Bitcoin when simply multiplying the two factors; a sort of inflation-adjusted view of the currency.

Effectively, the quantitative analysis of supply and demand is really what the currency exchange traders attempt to accurately determine which is conveyed through buying and selling of Bitcoin, setting a VALUE via the PRICED exchange rate of the currency. On a side note, most of the big Market Makers (FX Traders) use this price movement as a way to make a profitable living, as well. Especially when price fluctuations are a consequence of hype or fear (bubbles, cliffs), not factual supply/demand data, and are wildly out of the real price range.

Thus, if you analyze the proper macroeconomic data in an attempt to forecast future DEMAND for more Bitcoin (price increase), you will realize some very interesting things, and have a more accurate picture of where the price is going...

Happy trading! Wink
As a barometer of healthy money, the world’s best economies have average annual inflation rates below 1.5%.

In economic terms, low to zero inflation is a sign of healthy money because the value of the currency does not fluctuate significantly and is therefore reliable. However, in a country like Argentina, the annual inflation rate is estimated to be close to 40% today.

That means if you’re an Argentinian citizen and you save 100 Argentine Pesos, one year from now the value of those 100 pesos will be worth only 60 pesos relative to the world’s stable currencies. In Argentina, holding money means losing money, and so its citizens are actively looking for alternative stores of value to simply preserve the money they have earned and worked for.

Other examples of problematic economies with high inflation rates are Venezuela, which is expected to have annual inflation of 180% in 2015, and Zimbabwe, where the rate of inflation for the Zimbabwean Dollar was so high that this year they decided to stop printing it and the government is abandoning their currency altogether.

Zimbabwe went through a period of what is known as hyperinflation; their annual inflation rate in 2008 was recorded as high as 11,000,000%. What currencies could citizens from these countries use if not their own? The US dollar? Gold? M-Pesa? Bitcoin?

The reasons for such high inflation rates are complicated and they vary from country to country, but a common theme is that these rates are only found in government-backed fiat currencies.

Governments can lose control of their money in various ways because as with all fiat currencies, their values are tied to the laws of supply and demand. If a government prints too much money then the value of its currency can deteriorate, as seen recently in Zimbabwe, and after WWI in Weimar Germany.

History is full of stories underscored by the failures of money, and if history repeats itself, the future will be no different.

Given bouts of high volatility in bitcoin, it may be difficult to understand how this new Internet currency can act as a store of value. However, comparing the rate of fluctuation of the price of bitcoin to some of the fiat currency examples above, bitcoin contends as a candidate for an alternative currency.

Part of its appeal in countries with strict currency controls is the relative ease in which it can be acquired and used, especially considering all one needs is an Internet connection. Once money is converted into bitcoin, the inflation rates of local fiat currencies do not affect bitcoin holdings and it can be sent anywhere through the Internet for free.

Additionally, no one but the account owner has access to their bitcoin. This is especially important in light of the financial crisis.

In 2013, banks in Cyprus became insolvent but were bailed out by European and international monetary authorities. However, one of the conditions for Cyprus to receive the emergency funding was that bank depositors had to pay part of the tab.

That meant depositors, those who had their money in the banks for safe-keeping, found their individual accounts drained 6–10% by the government, overnight. That would be impossible with digital currency like bitcoin, which makes it valuable for many who reside in parts of the world with deteriorating economies and/or currencies.

Bitcoin also provides an option for those living in countries whose currencies are restricted or not free floating (eg China, Russia), looking to get money out of the country.

Even in the strongest economies the question of how stable certain fiat currencies really are is being tested. In a post-Great Recession world, governments of some of the leading economies decided to essentially print their way back to prosperity in one of the most massive economic experiments ever conducted: Quantitative Easing (QE).

The US led the way with QE in November 2008 with Ben Bernanke, then the head of the Federal Reserve, spearheading the experiment.

After Lehman Brothers collapsed, as the economic debacle unfolded, developed-market central banks became fearful of deflation as opposed to inflation, an experience Japan had been dealing with since the early 1990s.

Deflation is an insidious economic plague where citizens choose to hoard rather than to spend money, expecting lower prices for goods and services tomorrow relative to today.

However, an economy can only improve when its citizens spend money. When companies have too few customers because the masses are scared to spend, employees are laid off in order to cut costs, and unemployment rises, reducing income streams and thus spending power.

It’s a vicious downward spiral, and Mr. Bernanke decided that the best way to stimulate the economy would be to increase inflation and lower unemployment, and he aimed to achieve this through massively increasing the money supply of the US dollar.

The US printed trillions of newly minted dollars over the six year period from 2008 to 2014 in an effort to stimulate the economy. The program worked to a degree, inflating asset prices per design due in part to the US dollar representing the world’s strongest economy as the global reserve currency.

The European Union (EU) has seen the success of QE in the US and has launched its own program to try to aid their unstable economy. The EU will print over 1 trillion new Euros by the time their version of QE is over.

Whether QE works in the long run remains to be seen, but the fact is governments have the power to print as much of their own money as they want. If QE does not work and inflation becomes rampant, there are severe economic consequences as history has shown us.
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November 27, 2017, 07:25:03 AM
 #880

An excellent post that I'll sticky so people can learn from.
As a barometer of healthy money, the world’s best economies have average annual inflation rates below 1.5%.

In economic terms, low to zero inflation is a sign of healthy money because the value of the currency does not fluctuate significantly and is therefore reliable. However, in a country like Argentina, the annual inflation rate is estimated to be close to 40% today.

That means if you’re an Argentinian citizen and you save 100 Argentine Pesos, one year from now the value of those 100 pesos will be worth only 60 pesos relative to the world’s stable currencies. In Argentina, holding money means losing money, and so its citizens are actively looking for alternative stores of value to simply preserve the money they have earned and worked for.

Other examples of problematic economies with high inflation rates are Venezuela, which is expected to have annual inflation of 180% in 2015, and Zimbabwe, where the rate of inflation for the Zimbabwean Dollar was so high that this year they decided to stop printing it and the government is abandoning their currency altogether.

Zimbabwe went through a period of what is known as hyperinflation; their annual inflation rate in 2008 was recorded as high as 11,000,000%. What currencies could citizens from these countries use if not their own? The US dollar? Gold? M-Pesa? Bitcoin?

The reasons for such high inflation rates are complicated and they vary from country to country, but a common theme is that these rates are only found in government-backed fiat currencies.

Governments can lose control of their money in various ways because as with all fiat currencies, their values are tied to the laws of supply and demand. If a government prints too much money then the value of its currency can deteriorate, as seen recently in Zimbabwe, and after WWI in Weimar Germany.

History is full of stories underscored by the failures of money, and if history repeats itself, the future will be no different.

Given bouts of high volatility in bitcoin, it may be difficult to understand how this new Internet currency can act as a store of value. However, comparing the rate of fluctuation of the price of bitcoin to some of the fiat currency examples above, bitcoin contends as a candidate for an alternative currency.

Part of its appeal in countries with strict currency controls is the relative ease in which it can be acquired and used, especially considering all one needs is an Internet connection. Once money is converted into bitcoin, the inflation rates of local fiat currencies do not affect bitcoin holdings and it can be sent anywhere through the Internet for free.

Additionally, no one but the account owner has access to their bitcoin. This is especially important in light of the financial crisis.

In 2013, banks in Cyprus became insolvent but were bailed out by European and international monetary authorities. However, one of the conditions for Cyprus to receive the emergency funding was that bank depositors had to pay part of the tab.

That meant depositors, those who had their money in the banks for safe-keeping, found their individual accounts drained 6–10% by the government, overnight. That would be impossible with digital currency like bitcoin, which makes it valuable for many who reside in parts of the world with deteriorating economies and/or currencies.

Bitcoin also provides an option for those living in countries whose currencies are restricted or not free floating (eg China, Russia), looking to get money out of the country.

Even in the strongest economies the question of how stable certain fiat currencies really are is being tested. In a post-Great Recession world, governments of some of the leading economies decided to essentially print their way back to prosperity in one of the most massive economic experiments ever conducted: Quantitative Easing (QE).

The US led the way with QE in November 2008 with Ben Bernanke, then the head of the Federal Reserve, spearheading the experiment.

After Lehman Brothers collapsed, as the economic debacle unfolded, developed-market central banks became fearful of deflation as opposed to inflation, an experience Japan had been dealing with since the early 1990s.

Deflation is an insidious economic plague where citizens choose to hoard rather than to spend money, expecting lower prices for goods and services tomorrow relative to today.

However, an economy can only improve when its citizens spend money. When companies have too few customers because the masses are scared to spend, employees are laid off in order to cut costs, and unemployment rises, reducing income streams and thus spending power.

It’s a vicious downward spiral, and Mr. Bernanke decided that the best way to stimulate the economy would be to increase inflation and lower unemployment, and he aimed to achieve this through massively increasing the money supply of the US dollar.

The US printed trillions of newly minted dollars over the six year period from 2008 to 2014 in an effort to stimulate the economy. The program worked to a degree, inflating asset prices per design due in part to the US dollar representing the world’s strongest economy as the global reserve currency.

The European Union (EU) has seen the success of QE in the US and has launched its own program to try to aid their unstable economy. The EU will print over 1 trillion new Euros by the time their version of QE is over.

Whether QE works in the long run remains to be seen, but the fact is governments have the power to print as much of their own money as they want. If QE does not work and inflation becomes rampant, there are severe economic consequences as history has shown us.
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