The only thing I don't understand is this: how is an upper bound on the supply of bitcoins deflationary? I constantly read pieces extolling this virtue.
Maybe I am reading this wrong. Perhaps prices in bitcoins will tend to be deflationary. But does that really matter? FX risk is the same thing as inflation/deflation, and you to buy in bitcoins you need to purchase bitcoins first. The floating rate guarantees no stability.
> how is an upper bound on the supply of bitcoins deflationary?
If the supply of currency doesn't grow at exactly the same rate as the economy as a whole, then overall prices in that currency will change. If the supply of currency grows faster than the economy, then the currency will become less valuable in relation to goods and services, and prices will rise. This is known as inflation. On the other hand, if the currency supply grows slower than the economy, then the currency will become more valuable in relation to goods and services, and prices will fall. This is known as deflation.
The upper bound on the supply of BTC is deflationary because it guarantees that the rate of growth in the supply in bitcoins is forever approaching zero. This means that, in the long run, any growth in the bitcoin economy whatsoever will result in deflation.
Whether that's a virtue or not is, at best, debatable. Economists generally agree that deflation is very bad in the modern economy. While they aren't synonymous, the historical record indicates that economic deflation and economic recessions (and depressions) tend to go hand-in-hand, and there's a fairly strong theoretical explanation for why this should be. That's the whole reason why governments try to always maintain a small amount of inflation. Zero (or near-zero) inflation might be the ideal, but policymakers consider deflation to be scary enough that they prefer to err a little bit on the side of inflation as a cushion to guard against deflation.
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The only thing I don't understand is this: how is an upper bound on the supply of bitcoins deflationary? I constantly read pieces extolling this virtue.
Maybe I am reading this wrong. Perhaps prices in bitcoins will tend to be deflationary. But does that really matter? FX risk is the same thing as inflation/deflation, and you to buy in bitcoins you need to purchase bitcoins first. The floating rate guarantees no stability.
> how is an upper bound on the supply of bitcoins deflationary?
If the supply of currency doesn't grow at exactly the same rate as the economy as a whole, then overall prices in that currency will change. If the supply of currency grows faster than the economy, then the currency will become less valuable in relation to goods and services, and prices will rise. This is known as inflation. On the other hand, if the currency supply grows slower than the economy, then the currency will become more valuable in relation to goods and services, and prices will fall. This is known as deflation.
The upper bound on the supply of BTC is deflationary because it guarantees that the rate of growth in the supply in bitcoins is forever approaching zero. This means that, in the long run, any growth in the bitcoin economy whatsoever will result in deflation.
Whether that's a virtue or not is, at best, debatable. Economists generally agree that deflation is very bad in the modern economy. While they aren't synonymous, the historical record indicates that economic deflation and economic recessions (and depressions) tend to go hand-in-hand, and there's a fairly strong theoretical explanation for why this should be. That's the whole reason why governments try to always maintain a small amount of inflation. Zero (or near-zero) inflation might be the ideal, but policymakers consider deflation to be scary enough that they prefer to err a little bit on the side of inflation as a cushion to guard against deflation.