Perspective | Bitcoin is a Really Interesting Asset: Talking about Bitcoin's Deflation Model and Its Impact on Price

Last week, the Federal Reserve lowered interest rates, and Federal Reserve Chairman Jerome Powell said shortly: "The World Central Bank plays an important role in combating the economic impact of this virus." The statement could simply be interpreted as: " In the event of a crisis, we will print banknotes collectively and coordinately ", which means that more money will be created and more currency in circulation will lead to higher inflation.

"Everyone knows that moderate inflation is good for the economy, and deflation can lead to economic stagnation."-This statement is so common that most people (including economists) have not even assessed its fairness Sex.

Analysis 丨 Bitcoin's deflation model and its impact on prices

The number of Bitcoins issued and the expected Bitcoin inflation rate. https://bashco.github.io/Bitcoin_Monetary_Inflation/

But Bitcoin's supply is limited, so its economic model is deflationary.

This article will explore the differences between deflation and inflation, and whether bitcoin's deflation will lead to long-term price increases.

Traditional economic perspective

Inflation is basically represented by rising prices of goods and services, while deflation is the opposite.

In short, in most cases, inflation and deflation are directly related to the central bank's monetary policy. To put it more simply, inflation and deflation depend on how aggressively the central bank prints new currencies.

Interestingly: Previous inflation and deflation were directly defined as increasing / decreasing the total amount of money in circulation. Today, the banking system is so complex that it is almost impossible to accurately estimate how much money is injected into the economy.

The traditional Keynesian economics school is based on the idea that moderate inflation is necessary for the economy.

Rising prices prevent people and companies from saving and stimulating them to spend and reinvest, thereby stimulating demand for goods and services, and thus the economy itself. Demand stimulated supply, production increased, and economic machines continued to operate.

If deflation occurs suddenly, the economy will collapse. Prices fall, people spend less, production falls, unemployment rises, prices fall further, and so on. (This process is called a deflationary spiral).

Examples of the negative effects of deflation include the Great Depression in the United States in the 1930s and the deflationary spiral that occurred in Japan in the 1990s.

Interestingly, the most conservative estimates suggest that the dollar has depreciated by more than 85% over the past 50 years due to inflation.

Another perspective of the economy

There are other schools of economics, and the Austrian school is one of them. These schools support different points of view, and after careful study, they have proved very reasonable.

They specifically pointed out that falling prices do not necessarily lead to a sharp drop in demand. People will definitely continue to buy food and other necessities. Moreover, they will not give up luxury goods.

For example, the technology industry is now suffering from local deflation: a new phone that sells for $ 1,000 today will become available for only $ 800 in two years. At the same time, people are still actively buying new phones.

Although it looks like a joke, it's not science, is it? So what happens if you look deeper into the data? It turns out that in this case, Japan's "typical" example looks very atypical.

Economists Andrew Atkeson and Timothy Kehoe have studied deflation and economic depression in various countries over the past 180 years and found that 63 out of 73 deflation periods This did not lead to a decline in economic activity, and 21 of the 29 periods of economic depression occurred during periods of inflation, not deflation.

Healthy deflation

No one has argued that increased deflation can actually lead to economic collapse. The consequences are no better than hyperinflation (by the way, we often see only deflationary spirals).

But ideal deflation or zero inflation will lead to sane consequences, and the market economy can deal with it alone.

  • The value of money will not be diluted by inflation, so people and companies will be able to save their income.
  • Repaying debt (and therefore borrowing) will be more difficult; those with heavy debt will be forced to declare bankruptcy and leave the business; and many debts will be refinanced on more favourable terms.
  • Countries will have to use taxes instead of printed currencies to carry out their activities; reduced debt will make economic development smoother (reduced bubble opportunities).

Interestingly: in the late 1970s, the United States was on the verge of hyperinflation: countries printed banknotes to stimulate the economy, but production has been slowing down rather than increasing. At the time, the Fed took many steps to achieve deflation. This will not be easy: unemployment has risen briefly, many businesses have gone bankrupt, and many protests have taken place, but the economy has fully recovered in a few years.

So why are all central banks doing their best to avoid deflation?

  • First, because all governments are in debt.
  • Second, because printing money is more acceptable to the people than raising taxes.
  • Finally, because monetary policy effectively stimulates (and regulates) the economy to a certain extent (at least in the short term).

Analysis 丨 Bitcoin's deflation model and its impact on prices

U.S. Public Debt and GDP

Everything has become more complicated, but simply put, with every new dollar (Euro / Ruble / Fran) printed, governments push themselves to the corner of inflation, which cannot be escaped without external assistance.

Scarcity of Bitcoin

What does that have to do with Bitcoin? Governments and central banks have no control over Bitcoin, they cannot copy it, and they don't need to care about their debt. Bitcoin provides an alternative to the current system.

Most importantly, if you carefully calculate the amount of existing Bitcoin now, you will be able to understand that its scarcity will only increase in the future. Nick Carter is a co-founder of Castle Island Ventures and a co-founder of Coinmetrics. He firmly believes that market capitalization is an irrational and inaccurate tool to measure the amount of capital contained in Bitcoin.

According to several studies, millions of Bitcoins have not been moved since 2009-2010, including Bitcoin addresses that are said to belong to Satoshi Nakamoto. They may be located in cold storage facilities, but they may also be lost forever.

Analysis 丨 Bitcoin's deflation model and its impact on prices

Bitcoin has been capitalized. By Coremetrics data.

So, how to calculate the amount of Bitcoin in the right way?

In order to make the capital estimation more accurate, taking into account both lost coins and coins not found by the owner, a capital measure was introduced. This indicator only considers Bitcoin in circulation. To this end, the total value of all Bitcoins at the latest move will be calculated, regardless of lost or currently uncirculated coins. Therefore, the value of capitalization is lower than the market value.

in conclusion

Bitcoin has many attributes that fundamentally distinguish it from traditional currencies used in the modern economy, such as a currency system based on the US dollar or the gold standard. Traditional currencies, including the US dollar, are based on debt, which is a component of fiat money. Bitcoin's attributes make it resistant to credit expansion because it has no direct relationship to debt. Therefore, if an economic crisis and deflation occurs in a Bitcoin-based economy, the increase in the real value of debt can lead to far more mild consequences than one might think. Therefore, the argument for a spiraling deflationary debt is meaningless in terms of the Bitcoin economy. We believe that many Bitcoin critics have not taken this into account when assessing the shortcomings of the Bitcoin deflation model.

In summary, the deflationary nature of Bitcoin, coupled with the fact that it is not tied to debt, makes it a truly interesting asset, not only for long-term investments, but also for the underlying transformation of the current economic system.