Deflation in Crypto: Less is More?

Deflation is a decrease in the overall price level of goods and services in an economy.

What is Deflation?

In terms of macroeconomics, deflation usually accompanies a reduction in the money supply. And prices can fall for a variety of reasons – including low productivity in the economy, technological advances, or simply a decline in demand.

For bitcoin, deflation is associated with a maximum supply of the cryptocurrency. A total of 21 million bitcoins will be mined - at which point no new coins will be created and there will be no more rewards per block.

In fact, the circulating supply of BTC will decrease over time as private keys are lost and coins become irrecoverable. Deflation is common to many other cryptocurrencies as well.

Deflationary currency systems are very unusual in economic history-in fact, cryptocurrencies probably represent the first example of this approach. Deflationary systems interest economists for this very reason, and some believe that the deflationary nature of cryptocurrencies will completely overturn the idea of money. Some are skeptical, suggesting that a deflationary currency system will inevitably lead to hoarding and liquidity problems.

The Bitcoin community is consistently concerned about the consequences of a deflationary system. Proponents believe that bitcoins theoretical infinite divisibility will solve potential deflationary problems. In addition, some believe that the real problem is not the deflationary nature of cryptocurrencies, but the inflationary nature of fiat currencies.

In this case, these people tend to assume that prices will naturally decline in the bitcoin economy due to increased innovation and productivity, but a deflationary spiral will not occur because bitcoin is not based on theoretical credit, but on real and finite money supply.

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