Does halving really create deflation?

[dragon695]

hey guys, i'm quite serious on this topic because of the confusing people when talking about Bitcoin "deflation". As far as I understand, the deflation is that goods are cheaper than they are on time or because there is no need to buy goods or the supply of money gets lower.
So for Bitcoin, why is there a deflation? Although I know that miners will find it harder to mine bitcoins after every Halving event, the value of our goods stays the same and is based on fiat money. Bitcoin's price is still being manipulated and it is not necessarily a strong growth after halving. or the best example is Litecoin. after halving, its price is halved instead of rising higher.
So, the question is, does the Halving event actually cause deflation, or is it just some bullshit theory?
Ps: I highly appreciate the comments with sincere contributions. Thanks

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[Getmon]

Deflation is the opposite of inflation. Inflation is directed upward while deflation is downward. The fiat currency is deflating because it is losing value over time, while the prices of goods and services are inflating, and as a result the purchasing power of the fiat currency is getting weak over time. Bitcoin is inflating because its value is increasing over time, the exact opposite of fiat. The rewards of miners, however, are deflating due to halving which happens every 4 years.

[NeuroticFish]

Inflation makes money weaker and it is usually related with increasing the quantity of money available. Inflation makes goods cost more and more, showing that the money has less and less power.
Deflation should be the opposite.
 

But actually even deflation may be incorrectly used for Bitcoin.
Bitcoin is a coin with limited supply. 21M and that's all. Ever.
But the actual number of coins in circulation is still increasing with every block mined. So it can seen as an inflation (!) and halving will reduce that inflation.

So it depends on what's the reference point/concept: if it's the total supply, nothing changes; if it's the money in circulation, it's a decrease of inflation, not a deflation.

[dragon695]

Deflation is the opposite of inflation. Inflation is directed upward while deflation is downward. The fiat currency is deflating because it is losing value over time, while the prices of goods and services are inflating, and as a result the purchasing power of the fiat currency is getting weak over time. Bitcoin is inflating because its value is increasing over time, the exact opposite of fiat. The rewards of miners, however, are deflating due to halving which happens every 4 years.

I understand that concept. But I mean the Halving event, not just bitcoin, but I want to talk about coins that have a PoW mechanism and a halving event every 4 years. I mean, lately I've been seeing a lot of forum members talking about halving as a deflation mechanism. I was just wondering if this was true or not, people were making theories themselves.

[dragon695]

Inflation makes money weaker and it is usually related with increasing the quantity of money available. Inflation makes goods cost more and more, showing that the money has less and less power.
Deflation should be the opposite.
 

But actually even deflation may be incorrectly used for Bitcoin.
Bitcoin is a coin with limited supply. 21M and that's all. Ever.
But the actual number of coins in circulation is still increasing with every block mined. So it can seen as an inflation (!) and halving will reduce that inflation.

So it depends on what's the reference point/concept: if it's the total supply, nothing changes; if it's the money in circulation, it's a decrease of inflation, not a deflation.

Oh, I realized the problem. because I don't quite understand how people talk about deflation, they often say that bitcoin or coins with a PoW mechanism often have deflation in place!
so I'm quite annoyed and I just hope that those who understand Halving and deflation will explain it more to me. Thank you very much and it has really clarified the problem. Hopefully through this article many people will identify and clearly distinguish between "Deflation" and Halving.

[1Referee]

As long as there is block inflation, it's exactly that, inflation. Only when the last one single satoshi has been minted, miners fully rely on transaction fees, then Bitcoin will start to be a deflationary currency. Why? Because people lose coins for 1001 different reasons. All the satoshis lost directly lower the number of circulating satoshis, and that happens year after year after year.

It's something we don't yet have to worry about because most of us won't live to tell what exactly is going to happen, and how the market will react to it.

[mk4]

The halving or the "halvening" causes the bitcoin that's being mined to be halved. The bitcoin that's currently being generated and entering the markets daily is 1,800. After the "halvening", the bitcoin generated daily will be halved to 900. Hence, being more scarce.

But remember, not because something got more scarcer, it doesn't automatically mean that the price will increase. The perfect example would be litecoin. After the halving, the generated altcoin halved. But yea, the price dropped too after a while. Why? Simply because there's not enough people buying litecoin. Regardless how many bitcoin is being generated per block or per day, that wouldn't matter if there are more bitcoin being sold on the market than being bought. In the end, it's always supply and demand.

[Getmon]

Deflation is the opposite of inflation. Inflation is directed upward while deflation is downward. The fiat currency is deflating because it is losing value over time, while the prices of goods and services are inflating, and as a result the purchasing power of the fiat currency is getting weak over time. Bitcoin is inflating because its value is increasing over time, the exact opposite of fiat. The rewards of miners, however, are deflating due to halving which happens every 4 years.

I understand that concept. But I mean the Halving event, not just bitcoin, but I want to talk about coins that have a PoW mechanism and a halving event every 4 years. I mean, lately I've been seeing a lot of forum members talking about halving as a deflation mechanism. I was just wondering if this was true or not, people were making theories themselves.

PoW coins with a design just like Bitcoin and Litecoin have a mechanism to deflate rewards. That's what halving is all about. It is deflating the number of coins rewarded to miners. That is somehow following the line of thinking that in every 4 years, the value of Bitcoin is also inflating. Which means that despite the deflation in the regular release of Bitcoin through PoW, the value is moving in the opposite direction, and the miners still rewarded sufficiently. If it's the value that you are talking about, there is inflation; in fact, deflation to the reward through halving, is a factor supporting it.

[alyssa85]

The answer is No. The halving reduces the rate of increase in the bitcoin supply. The bitcoin supply is currently increasing by 12.5 bitcoins per block, and it will increase by 6.25 per block after the halving.

As for "deflationary currency" - that refers to the purchasing power of the currency. If over time, you can purchase more and more with a bitcoin, it's deflationary. We can currently purchase nearly three times more goods with bitcoin than we could in January. That means it's a deflationary currency.

If you can purchase less with your currency than you did before, than it's an inflationary currency. You can purchase only 5% of what you could purchase with the dollar in 1919, so it's an inflationary currency.

As for does bitcoin create deflation in the economy? Does it force prices of goods to fall. The answer is no - it would only be able to do that if it was the sole currency people were allowed to use. But there are loads of currencies people use, including loads of cryptocurrencies.

[exstasie]

But remember, not because something got more scarcer, it doesn't automatically mean that the price will increase. The perfect example would be litecoin. After the halving, the generated altcoin halved. But yea, the price dropped too after a while. Why? Simply because there's not enough people buying litecoin.

It's a bit more nuanced than that. Markets react to all available information, and halvings are publicly known beforehand. Litecoin rising from $22 to $146 in the first two quarters of the year was likely the market "pricing in" the halving. Litecoin outperformed BTC and the rest of the altcoin market during that period and I think halving hype was likely the cause.

That's what BTC did in 2016 too. It rallied hard into the halving (doubled in price) but crashed a month before it. And then it kept crashing afterwards.

Buy the rumor, sell the news.

[Gyfts]

Halving creates scarcity and a limited supply is needed to prevent inflation. I wouldn't necessarily say it causes deflation because the markets are more complicated than that but at the least it ensures a limited supply forcing there to be demand.

[Kyraishi]

Deflation is the opposite of inflation. Inflation is directed upward while deflation is downward. The fiat currency is deflating because it is losing value over time, while the prices of goods and services are inflating, and as a result the purchasing power of the fiat currency is getting weak over time. Bitcoin is inflating because its value is increasing over time, the exact opposite of fiat. The rewards of miners, however, are deflating due to halving which happens every 4 years.

No, deflation isn't just the opposite of inflation. It's when the price of goods and services go down, whilst inflation rates are 0 percent, it's not the correct definition for a currency that gains value, etc.

I wouldn't classify it as deflation (the version you are referring to), since the supply is not being moved, but more and more bitcoin is getting injected in the economy. It's hard to describe what exactly is it, since it's not really a term that has been invented yet.

[teosanru]

hey guys, i'm quite serious on this topic because of the confusing people when talking about Bitcoin "deflation". As far as I understand, the deflation is that goods are cheaper than they are on time or because there is no need to buy goods or the supply of money gets lower.
So for Bitcoin, why is there a deflation? Although I know that miners will find it harder to mine bitcoins after every Halving event, the value of our goods stays the same and is based on fiat money. Bitcoin's price is still being manipulated and it is not necessarily a strong growth after halving. or the best example is Litecoin. after halving, its price is halved instead of rising higher.
So, the question is, does the Halving event actually cause deflation, or is it just some bullshit theory?
Ps: I highly appreciate the comments with sincere contributions. Thanks

Actually truth is yes it would such a thing. Deflation isn't merely a direction or prices going down. It actually is a phenomena where the aggregate demand in the economy for money is much higher than that of Aggregate supply of money in the economy. This means that money is required in the economy but it's not being created at a similar pace. This would lead to shortage of money and money hoarding among people who would then try to buy lesser things and store their money. Such a situation will make a economic crunch in the economy. So, in nutshell, halving will really create deflation as pace of new supply would be much lesser.

[mu_enrico]

Inflation/deflation is the effect, not the cause, and it measured via the price of goods and services to a particular currency. For example, let's say BTC price for one McDonald's Big Mac is 0.001 BTC. If next year the price increase to 0.002 BTC, then it's called inflation, conversely if the price decrease to 0.0005 BTC, then it's called deflation.

Many things could cause this inflation/deflation, such as:
- increase/decrease in the money supply;
- technological advancement;
- force majeure, etc.
(read about cost-push and demand-pull)

So back to the OP question, "Does halving really create deflation?" Not always, the money supply is only one out of various other factors. Using my Big Mac example, it depends on the cow population, bread availability, your burger preference, etc.

[binhvo1505]

As long as there is block inflation, it's exactly that, inflation. Only when the last one single satoshi has been minted, miners fully rely on transaction fees, then Bitcoin will start to be a deflationary currency. Why? Because people lose coins for 1001 different reasons. All the satoshis lost directly lower the number of circulating satoshis, and that happens year after year after year.

It's something we don't yet have to worry about because most of us won't live to tell what exactly is going to happen, and how the market will react to it.

So in your opinion, deflation will not happen now, but when the supply of bitcoin is fully mined and the demand is high, then deflation will occur?
but there is another theory that bitcoin is just a tool for sharks to manipulate. So if one day, people realized the value of bitcoin and no longer needed to buy it, would it become zero and disappear? so there will be no deflation then? right?

[fillippone]

When I read this kind of question, or even read some articles on crypto's I always feel there's a big misunderstanding about the term "inflation".
In layman terms, the term inflation refers to purchasing power of a currency. Inflation actually measures the rate at which the price level moves over a given time horizon. If prices go up, then we say there’s inflation, if prices goes down, we say there is a deflation.
On a side note, it very difficult to measure all the prices in an economy, so the inflation measure observe a subset of prices, the price of a given basket of goods: the composition of such basket greatly influences the outcome of the inflation measure.

In the recent years, in the US and much more in the EU we have observed a decreasing inflation: prices have always been increasing but at a much lower pace. Every CB has a target of inflation, as a sole or conjunct target of around 2%. So broadly speaking we can think at this of a current level of inflation, while back in the 80’s we observed levels above 10%.

This means that the fiat currencies lose value in real terms: if I have to pay 2% every year to buy the same liter of milk of loaf of bread this doesn’t mean milk or bread increased value, but we are using a devalued currency: it’s like measuring your height with a shorter and shorter meter, you aren’t getting higher, you are using a shorter unit of measure.
What causes inflation is a very complex matter, some indication have been written here on the thread, but I will analyses only one of those: “money supply”.
Let’s think about an economy with stable inflation at 0%: prices are still, and I have been able to buy my milk for 1$ since 10 years. Let’s think about the CB governor going nut ant printing more money: he decided to print 1 additional dollar for every dollar available: everyone eventually get his extra dollar: what do you think it happen to prices? Yes, the same old liter of milk now it’s sold for 2 dollars.
Money supply is then the most important figure to look at to look at when trying to figure out where inflation is coming from.

Now to bitcoin.
Bitcoin is a deflationist currency: contrary to fiat currencies who have lost most of their values over the years (a gallon of milk cost 1.65$, while today is 4$) it has always been appreciating in real terms, this means it has always (not always actually if we think at December 2017) gained value. Two large pizzas were sold for 10,000 BTC in 2010, but now they are sold for 0.004 BTC.
In this sense bitcoin is a currency that has exhibited a deflation, even if the money supply has always been positive, yet decreasing.

Bitcoin money supply is predetermined, and halves every 210,000 blocks, typically every 4 years.  Bitcoin money growth is the moment  around 3,70%, and it will be halved to 1,80% at the next halving event.
To recap: bitcoin is currency with a money supply growing at decreasing rate. The market forces driving his price have caused Bitcoin to exhibit a deflationist behavior.
Money supply is hard coded in the bitcoin protocol, while the deflationist property is only the result of the balance between supply and demand on the market.

Regarding the relationship between halvin/monetary supply/price relationship the best advicee i can give  you is read my thread in signature about SF model:

Stock To Flow Model: Modeling Bitcoin's Value with Scarcity

[1Referee]

So in your opinion, deflation will not happen now, but when the supply of bitcoin is fully mined and the demand is high, then deflation will occur?

It technically doesn't even rely on demand in my example, but demand is always a helping factor to keep coins *temporarily* out of circulation.

but there is another theory that bitcoin is just a tool for sharks to manipulate. So if one day, people realized the value of bitcoin and no longer needed to buy it, would it become zero and disappear? so there will be no deflation then? right?

I do not believe in conspiracy theories. They're admittedly exciting to read, but don't take them too serious. Demand can drop, and it could perhaps drop significantly at some later point in the far future, but not to a point where Bitcoin's value nullifies entirely and everyone stops mining and running nodes.

Bitcoin started out as a small network where coins weren't even officially tradable on exchanges as we know it today. People were just exchanging them between themselves through forums and whatnot. I'm pretty confident that in the worst case scenario for Bitcoin it will be used in a similar fashion. Perhaps not interesting as investment, but very interesting from a use perspective.

[gentlemand]

The halving means less inflation. There's deffo no deflation on the cards.

This one will be a biggie because the inflation will fall below 2% which is often the figure of a decently managed normal economy.

When you think of the absolute tidal wave of new coins that were arriving yet still the price had some powerful rises and how much better and bigger the platforms are now it could make for a powerful scenario.

[Ucy]

One of the important points by those who believe halving will increase the price alot is that the amount of bitcoins dumped by miners will reduce which will contribute to the increase in the price of Bitcoin.
My guess is that some will try to suppress any possible effect on the price by the halving. that is, if the community allows suppression to happen by then.

[Vishnu.Reang]

The halving means less inflation. There's deffo no deflation on the cards.

This one will be a biggie because the inflation will fall below 2% which is often the figure of a decently managed normal economy.

When you think of the absolute tidal wave of new coins that were arriving yet still the price had some powerful rises and how much better and bigger the platforms are now it could make for a powerful scenario.

Thanks for defining it clearly. But still it is surprising to see the prices going down so steeply, with the next block reward halving only a few months away. The user base is increasing at a good pace, and with inflation at such low levels, ideally we should be witnessing a sharp jump in the exchange rates. But quite the opposite is happening right now.