Why is deflation considered to be an admirable feature of Bitcoin?

[cottenio]

Bitcoin: A Peer-to-Peer Electronic Cash System

6. Incentive

"Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free." - Satoshi Nakamoto

Given that we've seen other cryptocurrencies & blockchains that have inflationary models still "succeed" in the sense of having transactional value, why is deflation considered an admirable feature of Bitcoin?

In virtual world economies we know that closed supplies inevitably lead to mudflation, unsustainable pricing, and rampant speculation (Koster, et al).

How much did the deflationary model contribute to Bitcoin's shift to store-of-value?

Was the whole premise of starting Bitcoin under a deflationary model based on an economic fallacy in the hopes it would encourage valuation?


Feedback Summary from Comments

Question: Regarding the premise, is Bitcoin deflationary?

• Yes. It is deflationary right now due to its fixed supply.

• Yes. It is deflationary *eventually* due to the end of mining and the random loss of private keys.
• No. It is inflationary.

• No. It is disinflationary rather than deflationary.

• Other. It is a "fixed supply currency" without "scheduled deflation".

Assertion: Fiat will always suffer from hyperinflation; only lasting a century or two.

• Counterexample: British Pound.

Assertion: Bitcoin's annual inflation rate is ~5% 1.82% (2022-10-26).

• Updated to 1.82%: Woobull Charts pegs the current Bitcoin inflation at 1.82% (2022-10-26) https://charts.woobull.com/bitcoin-inflation/.
• Bitcoin is deflationary under the common definition because its purchasing power increases over time. Conversely, Bitcoin and gold are inflationary while their known finite supply is still being mined. (Hays, Demelza) Why Bitcoin is Technically an Inflationary Currency

Assertion: Deflation is when supply reduces over time. It is not a finite supply metric.

• Agree: Since deflation is "negative inflation" then inflation of 0% doesn't count as deflation. (O'Sullivan, Arthur; Sheffrin, Steven M. (2003)). Economics: Principles in Action
• Disagree: Deflation is a decrease in the general price level of goods and services [supply reduction being one possible cause]. (Robert J. Barro and Vittorio Grilli (1994)), European Macroeconomics, chap. 8, p. 142.
• Other: Hoarding/holding decreases the usable supply, so fixed supplies are naturally deflationary. (Nakamoto, Satoshi) Re: Dying Bitcoins, (Simpson, Zachary) The In-game Economics of Ultima Online

Assertion: Bitcoin's divisibility will solve demand issues.

• Yes.
• Neutral: Divisibility allows flexibility with how Bitcoin values are displayed. (Nakamoto, Satoshi) Re: How divisible are bitcoins and other market/economic questions
• No: "Dust" (small values) can't be traded on the main network due to high fees. (Coppola, Frances) Why Bitcoin Should Be Priced in Sats (and Why It Has a Divisibility Dilemma)

Assertion: Bitcoin is neither deflationary nor inflationary.

• Agree: Because it has a fixed supply its ultimate state is neither inflationary nor deflationary.
• Disagree: It currently demonstrates inflation while being actively mined.
• Disagree: Even when fully mined the loss of private keys results in decreased supply, causing deflation.
• Disagree: Even without loss of private keys the act of hoarding/saving decreases active supply, causing deflation.

Assertion: Inflation is correlated with human decision making.

• Counter-example: Ethereum is inflationary by design.
• Counter-counter-example: Ethereum's inflationary rates have demonstrably been changed by community consensus; similar to governmental monetary policy

Debate: Has Bitcoin shifted to store-of-value over being a medium of exchange or unit of account?

• No: It hasn't made a "full transition" to store-of-value. Note the growth of Bitcoin payment processors.

• Yes: Bitcoin is too volatile to use as a currency, and Bitcoin payment processors are just spot-pricing fiat. (Baur, Dirk and Dimpfl, Thomas) The volatility of Bitcoin and its role as a medium of exchange and a store of value

Facts:

• Bitcoin has no supply burning mechanism.

• Access to coins can be lost (via loss of private keys), but the coins stay on the ledger.

Reasons "why" deflation is an admirable feature:

• Increases purchasing power

• Hyperinflation hurts consumers

• Value expected to increase over time

• Acts as a hedge against real world monetary inflation

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[darkangel11]

Fiat monetary systems rely on inflation because otherwise people would hoard it and starve the economy. These systems are built very simple. Fiat is made to last a century or two and then it goes into hyperinflation and needs to be reset, but what if you had an alternative to your fiat money that can be hoarded and also spent, but spending it would be incentivized somehow. What if businesses that want you to pay with bitcoin lower the prices. What if there's less tax on bitcoin payments? What if Bitcoin users become VIP clients in certain places?

We spend fiat money because we know it loses value so you choose investments, but investments block your ability to spend. We can't sell bonds, gold or real estate fast enough to be able to fill our gas tank or book a plane ticket.

You could say people will never spend their bitcoin knowing that it deflates but what if it stabilizes and starts to deflate 5% a year? It's going to feel safe enough to hold as an investment while being spendable without regrets.

IMO bitcoin can work as a deflationary currency especially alongside another inflationary currency.

[bitmover]

Bitcoin: A Peer-to-Peer Electronic Cash System

6. Incentive

"Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free." - Satoshi Nakamoto

Given that we've seen other cryptocurrencies & blockchains that have inflationary models still "succeed" in the sense of having transactional value, why is deflation considered an admirable feature of Bitcoin?

Bitcoin is not deflationary. It is inflationary.

In this classic Chart you can see that bitcoin inflationary rate is about 5% a year

[cottenio]

Bitcoin is not deflationary. It is inflationary. It will become inflation free in a few decades, and deflationary if we consider the lost coins in many decades..

In this classic Chart you can see that bitcoin inflationary rate is about 5% a year

https://www.futurypto.com/wp-content/uploads/2020/12/bitcoin-inflation.png

I love this explanation because it seems to demonstrate Bitcoin acting like a proper market because the supply is still open (even if the end-game model is deflationary), while most NFTs with their closed supply models seem to immediately follow the product adoption curve and wither away.

[GreatArkansas]

Given that we've seen other cryptocurrencies & blockchains that have inflationary models still "succeed" in the sense of having transactional value, why is deflation considered an admirable feature of Bitcoin?
(.,....)

Hyperinflation is one of the many problems we have in current finance or economy, it is very common and if you will take a look it is a very devastating situation for consumers, especially in some countries where the inflation rate is increasing in huge percentages, so Bitcoin is solving it, Bitcoin created to solve this. And if you take a look on the long term goal of Bitcoin and how it really works as time goes by, it is indeed to solve inflation rate especially when our governments can print unlimited fiat currency which is also a trigger for increasing the inflation rate.

[cottenio]

Given that we've seen other cryptocurrencies & blockchains that have inflationary models still "succeed" in the sense of having transactional value, why is deflation considered an admirable feature of Bitcoin?
(.,....)

Hyperinflation is one of the many problems we have in current finance or economy, it is very common and if you will take a look it is a very devastating situation for consumers, especially in some countries where the inflation rate is increasing in huge percentages, so Bitcoin is solving it, Bitcoin created to solve this. And if you take a look on the long term goal of Bitcoin and how it really works as time goes by, it is indeed to solve inflation rate especially when our governments can print unlimited fiat currency which is also a trigger for increasing the inflation rate.

To be fair, Bitcoin was created to solve the problem of double-spending in digital currencies - and it succeeded.

I admit I'm skeptical that Nakamoto's desire for a deflationary end-game has merit, given that his original vision for "peer-to-peer cash" died during the unanticipated arms race of CPUs -> GPUs -> ASICs. If TX fees were natively better than credit cards it'd be competitive in that way, but it's not. His brilliance was in PoW and the timestamp system itself, not necessarily in prophesying economic design patterns.

What I see today is that Bitcoin has made a full transition to store-of-value and speculative investing. And, since there's a deflationary model waiting at the end, it feels like we're just going to see a repeat of what happens in the other closed supply virtual economies we've seen over the last 25 years: crashing and burning.

I'd like to be wrong and would love to see more data/research on why "deflation" is a good idea; not just anecdotes about hyperinflation risks.

Are there any economic analyses of Bitcoin by academic researchers with economic backgrounds that believe the deflationary model is good in the long run?

[Fundamentals Of]

Whether it will prove to be an economic fallacy or not, only time will tell. But the fundamental laws of economics about supply and demand probably affected Satoshi's idea when he designed Bitcoin. He envisioned Bitcoin to be used as a peer to peer currency. The demand won't go down because its money. And because the supply is deflating, the value of Bitcoin is expected to rise over time. But let's not forget that this is all an experiment.

Satoshi must have also deeply studied the fatal flaws of fiat. And its inflationary system is one of them.

So far it seems Satoshi is right. One of the reasons why people store value in Bitcoin is that it has a fixed supply that can't be abused by anybody.

[tranthidung]

Bitcoin is not deflationary. It is inflationary.

In this classic Chart you can see that bitcoin inflationary rate is about 5% a year

People call it as deflationary because of its finite supply that can not be changed.

How is the 21 Million Bitcoin Cap Defined and Enforced?

Additionaly, I have one topic Investigate, assess news. Don't simply read and make wrong decisions in which I estimated about 4M BTC was lost. Obviously, it's only an estimation and the actual lost BTC would be either bigger or smaller than that figure.

Explore and make your own estimation with HOLD waves from lookintobitcoin.com

[cottenio]

So far it seems Satoshi is right. One of the reasons why people store value in Bitcoin is that it has a fixed supply that can't be abused by anybody.

Interesting, but how do we reconcile this with Ethereum's "me too" demonstrated store-of-value given it has an inflationary supply model?

Is the deflationary supply model even relevant to Bitcoin's success right now? How would we prove or measure that?

[bitmover]

Bitcoin is not deflationary. It is inflationary.

In this classic Chart you can see that bitcoin inflationary rate is about 5% a year

People call it as deflationary because of its finite supply that can not be changed.

How is the 21 Million Bitcoin Cap Defined and Enforced?

Additionaly, I have one topic Investigate, assess news. Don't simply read and make wrong decisions in which I estimated about 4M BTC was lost. Obviously, it's only an estimation and the actual lost BTC would be either bigger or smaller than that figure.

Deflationary is when supply reduces over time. It is not a finite supply metric.

Even with 4M btc were lost so far, that that doesn't mean people will be losing enough btc over time to make it deflationary.  Network stills generates 5% of total supply per year, which is about 1M btc per year.

4M were lost when it wasn't worth much money... people will be losing at slower rates from now on.

[OgNasty]

I don’t believe Bitcoin can be classified as an inflationary currency. This is because we know how many exist and none can ever be made beyond that limit of what can be mined. That can be interpreted however you’d like, but in the end it is this 21M limit that gives Bitcoin it’s value proposal. No entity being able to inflate the units gives Bitcoin a unique store of value argument that has so far seemed popular enough to propel the market cap into the trillions at one point and is still very much in a growth pattern.

[pooya87]

Given that we've seen other cryptocurrencies & blockchains that have inflationary models still "succeed" in the sense of having transactional value,

That is not what "success" means. Success is defined with having real adoption in the real world not just having a price on an exchange. For example there are currently altcoins that don't even have a blockchain anymore but they are still being traded on some exchanges like Yobit and have a price. By all definitions these altcoins are dead but they have a "value" still.

How much did the deflationary model contribute to Bitcoin's shift to store-of-value?

Was the whole premise of starting Bitcoin under a deflationary model based on an economic fallacy in the hopes it would encourage valuation?

The main point was to have a currency that unlike fiat currencies is not printed until the end of time. In other words an alternative currency that is different.

while most NFTs with their closed supply models seem to immediately follow the product adoption curve and wither away.

Technically since you can always create more NFTs that are exact copy of each other, their supply is unlimited regardless of what one of them does.

What I see today is that Bitcoin has made a full transition to store-of-value and speculative investing

You should know that just because you see a lot of people talk about bitcoin as an investment, that doesn't mean bitcoin has made a "full transition". The fact is that people talk about price and profit more than they talk about bitcoin as a currency but the adoption as a medium of exchange grows side by side with the adoption as an investment.
For example if you check the number of "payments" using bitcoin in shops accepting bitcoin payments, the bitcoin payment processors, etc. you can see this growth clearly.

[witcher_sense]

How much did the deflationary model contribute to Bitcoin's shift to store-of-value?

Bitcoin's model is based on asymptotically decreasing inflation: it is dis-inflationary rather than deflationary. That some people assume that in the long run, more and more and more people will start to lose their private keys is a mere assumption that may turn out to be a reality or may not. We easily can assume exactly the opposite: the scarcer bitcoin becomes, the higher the willingness of people to keep their private keys in safety will be, which automatically will sustain a fixed supply.

Was the whole premise of starting Bitcoin under a deflationary model based on an economic fallacy in the hopes it would encourage valuation?

Are you trying to attack bitcoin or what? All bitcoiners know that value is always subjective, and the perceived rarity of something may impact positively the valuation from different individuals. And by the way, Satoshi wanted bitcoin to become a peer-to-peer decentralized currency,  the main goal of which is to give people a way to peacefully opt-out from the traditional financial system to transact with whoever they want, permissionlessly. He never talked about speculation or bitcoin price and didn't sell a single bitcoin.

[Charles-Tim]

"Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free."

What is inflation? Money declination in value, and persistence rise in price of goods and services.

Assuming all bitcoin are mined, bitcoin reached all-time-high, followed by a significant bear market. If people invested in bitcoin at the time, they may later make profit after several months of unrealised losses. But as they lose, is bitcoin not inflationary at the time? It is, but deflationary in long term. That is why bitcoin should be considered as a speculative asset in short term, because you can invest in it for a short period of time and lose, or make profit from it.

Not only supply of newly mined coins that would result to inflation, also as more people sell an asset like bitcoin, the price will reduce.

How much did the deflationary model contribute to Bitcoin's shift to store-of-value?

Very simple to understand. You can read more about the pizza day, how much bitcoin was worth at the time and compare it to now and see how to large extent bitcoin price has increased. Also you can check every halving, check the lowest price of bitcoin and the highest price, or be checking the highest price of bitcoin in each halving, you will understand that bitcoin has been a store of value after each halving or every four years.

Was the whole premise of starting Bitcoin under a deflationary model based on an economic fallacy in the hopes it would encourage valuation?

Maybe, but said to be a decentralized p2p means of transferring money which can be central authority independent.

Bitcoin is not deflationary. It is inflationary.

In this classic Chart you can see that bitcoin inflationary rate is about 5% a year

I do not believe all these data, what I believe in is a time to invest to be the right time. Even gold was said to be deflationary and a store of value, but those that invested in gold in 2020 at a be price over $2000 are now losing as the price presently is $1660.

[bitmover]

I do not believe all these data, what I believe in is a time to invest to be the right time. Even gold was said to be deflationary and a store of value, but those that invested in gold in 2020 at a be price over $2000 are now losing as the price presently is $1660.

You don't believe in data? 

You are just have a misconception. Inflation has nothing to do with trade or timing.
Your short time profit/loss is not related to inflation

Usd has a 10% inflation per year and usd/eur pair is reaching news highs every month.

Do you believe in usd inflation data?
 if you bought usd a few months ago there would be no inflation in the United States?

[Charles-Tim]

You don't believe in data? 

What I am trying to imply was that if someone speculated appropriately, invested in bitcoin at the right time, that it can be a hedge against inflation and also be a store of value.

[Ucy]

Bitcoin: A Peer-to-Peer Electronic Cash System

6. Incentive

"Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free." - Satoshi Nakamoto

Given that we've seen other cryptocurrencies & blockchains that have inflationary models still "succeed" in the sense of having transactional value, why is deflation considered an admirable feature of Bitcoin?

In virtual world economies we know that closed supplies inevitably lead to mudflation, unsustainable pricing, and rampant speculation (Koster, et al).

How much did the deflationary model contribute to Bitcoin's shift to store-of-value?

Was the whole premise of starting Bitcoin under a deflationary model based on an economic fallacy in the hopes it would encourage valuation?

The deflationary feature really helps preserve the value which makes it a good Store of Value. It's a fair model unlike fiat currency like dollar which typically loses value overtime due to its inflationary model. Not a good idea to have someone put his/her  "life saving" in dollar long-term as the saving will lose value and won't be able to buy what it normally would buy when the money was first saved... That can be considered cheating. Satoshi certainly don't want that to happen to Bitcoin and it's long-term holders hence the deflationary feature. The feature makes Bitcoin a good Store of Value compared to inflationary currencies.

By the way, Bitcoin could likely become so divisible that printing more will be unnecessary. If demand becomes too high in the future it becomes more divisible.




.

[Fundamentals Of]

So far it seems Satoshi is right. One of the reasons why people store value in Bitcoin is that it has a fixed supply that can't be abused by anybody.

Interesting, but how do we reconcile this with Ethereum's "me too" demonstrated store-of-value given it has an inflationary supply model?

Is the deflationary supply model even relevant to Bitcoin's success right now? How would we prove or measure that?

I'm not sure if Ethereum remains inflationary after the Merge. It might have shifted to a deflationary supply model. But that's not the point though. Ethereum could only "me too" in terms of its deflationary model. How about the other features? Ethereum can't "me too" the whole of Bitcoin.

I think Bitcoin's supply model is not only relevant but central to its success. That it only has 21,000,000 in total supply and that it can't be changed give people a big assurance.

[BlackHatCoiner]

why is deflation considered an admirable feature of Bitcoin?

It's not deflation necessarily that is the feature. It's the scheduled inflation rate, which is what I'm sure he meant.

The concept is admirable, because every time demand rises for a product or asset, the supply increases; except with bitcoins. Bitcoins cannot be debased. There will be that many in October 25th 2022, that many in 2050, that many in 2140. There's no asset with such predictable inflation rate.

[cottenio]

Fiat monetary systems rely on inflation because otherwise people would hoard it and starve the economy.

Yes, this is proven true by virtual economies as well: a closed supply leads to hoarding and spiraling prices.

These systems are built very simple.

I'm not sure if "simple" is the best description of modern monetary policy.

Fiat is made to last a century or two and then it goes into hyperinflation and needs to be reset,

Are there counterexamples in the real world? For instance, has the British Pound been subject to hyperinflation? Has it been reset?

but what if you had an alternative to your fiat money that can be hoarded and also spent, but spending it would be incentivized somehow.

What incentivizes spending Bitcoin? It doesn't decay if you don't use it. Doesn't it incentivize saving/storing it as an investment for future yield?

What if businesses that want you to pay with bitcoin lower the prices. What if there's less tax on bitcoin payments? What if Bitcoin users become VIP clients in certain places?

These are interesting use cases, especially the latter - which is more of a social construct based on exclusivity.

The second part is possible in jurisdictions like El Salvador where they've made Bitcoin legal tender and might have such an incentive.

The first part has been demonstrated before.

A caveat: I used to help e-commerce businesses transact with Bitcoin but the transaction fees made that untenable. Yes, we have solutions like Lightning today, but that only means that Bitcoin's original vision as having low-fee transactional utility isn't feasible. Unless that wasn't ever Satoshi's vision (but it sure seemed like it, given he also believed mining would be more democratic "across laptops" and hadn't anticipated mining pools yet).

We spend fiat money because we know it loses value so you choose investments, but investments block your ability to spend. We can't sell bonds, gold or real estate fast enough to be able to fill our gas tank or book a plane ticket.

You could say people will never spend their bitcoin knowing that it deflates but what if it stabilizes and starts to deflate 5% a year? It's going to feel safe enough to hold as an investment while being spendable without regrets.

A caveat: those who buy Bitcoin before each major price movement may feel cheated when their "spending" looks foolish in hindsight, and they should've "held on" which, over time, leads to less spending and more hoarding.

IMO bitcoin can work as a deflationary currency especially alongside another inflationary currency.

I think the evidence is in front of us that it does work as a deflationary currency, alongside other inflationary currencies.

A caveat: just not the way it was possibly intended? How firm was Satoshi on Bitcoin as having low-fee transactional utility vs. being digital-gold-store-of-value? I've read a lot of his emails and work but it always felt like he was adapting to the changing climate as mining hashrate spiraled out of control. Happy to have contrary sources - or, a clear timeline of what "his vision" was and if/how it changed.