250bpm

Bitcoins & Deflation

Once again I've stumbled over an article today that suggests that the big problem with Bitcoin is deflation. The overall amount of Bitcoins is fixed, thus, there's no way to inflate the currency and the only possible outcome is ever increasing value of the coin…

Consider the following facts though:

  1. All the Bitcoins will be mined in approximately 100 years.
  2. The human population will reach its peak in 100 years and starts declining afterwards.

Comment: Pt 2 is the official UN estimate. I've also seen predictions of peak being reached in as few as 30 years.

Once the populations starts declining it'll effect the value of money as there will be more money available per person.

The price of "permanent" resources, such as land, is not likely to be affected (there will be proportionally more land per person to match the increase in the money supply), but the price of "renewable" resources such as food will increase (same amount of food per person, but more money to buy it).

The result of such dynamic is, of course, inflation. Inflation of both fiat money and decentralised currencies such as Bitcoin.

So, all in all, the deflation problem with Bitcoin is not as grave as it seems to be.

We should rather think about how to fight inflation in decentralised environment. Maybe, when the problem hits, we can burn a little money with every transaction? If so, wouldn't it encourage hoarding as opposed to moving money around? Maybe governments should burn tax Bitcoins? But then, any government that does so puts itself into disadvantage as they bear the cost while everyone else profits. And so on.

Dec 19th, 2013