Bitcoin Supply and the Economics of Deflation
Bitcoin’s constant supply is probably the best argument to justify its intrinsic value. Moreover, it also helps in making the asset ‘deflationary.’
‘Inflation’ is the biggest demon of the current economic system. The Central or Federal Authorities exercise their right to print money at their will. However, over the decades, they have misused their power to create a highly unstable economy.
In simple terms, deflation is the decrease in the price of goods and services. One the other hand inflation causes an increase in the price of things.
Economist John Maynard had suggested that inflation is necessary for economic growth. This is because as the efficiency in the economy continues to grow indefinitely, and there would be a paradox of thrift. People would wait for things to get cheaper to invest or buy them.
However, if the banks continue to induce fresh liquidity in the system, people become motivated to spend. Nevertheless, due to the rising debts of nations and unsustainable credit policies, inflation has become a curse for the world. ‘
Bitcoin’s Deflation Is Necessary
Deflation can be a lousy aspect as more and more people will try to save the asset in question, rather than spend it. This will hinder the motivation for innovation and consequently, the overall production would be hurt.
However, due to its limited supply and fixed mechanism of production, Bitcoin, or any other store of value must be ‘deflationary.’ As the value of things purchased in Bitcoin decreases, the overall increase in the price of Bitcoin would balance the deflation.
During the 1930s, the global presence and price of Gold decreased drastically as the US Government abolished Gold in replacement for the US dollars.
However, post world war II Europe, Japan, China, Russia, and the other countries started making progress as well, the demand for their currency over USD refected the fact.
In response, the Federal institutions began increasing their supply of Gold, which is also a unified currency. Hence, the demand for Gold started picking up.
The price of Gold is just a unified metrics for the global currencies of the world. As the countries make progress, they tend to increase their reserves.
Hence, Bitcoin as ‘digital gold’ would function in a similar way. It will be used as a store of value. Moreover, Bitcoin would act as a productive exchange medium even after it because it was designed to be divided into eight decimal places. The smallest unit of Bitcoin, Satoshi (sats) is 0.00000001.