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Can Deflation Destroy Bitcoin?

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Value Deflationary

Bitcoin was created with the model of deflation in mind. The amount of Bitcoin produced each year will slowly decrease until it stops completely once the supply reaches 21,000,000. The idea behind this was to make Bitcoin worth more in the future. As it becomes harder to own, demand will go up and so will the price.

Fiat currencies are typically inflationary, meaning their buying power decreases over time. Bitcoin is deflationary, meaning buying power increases over time.

Mainstream Currency Deflation

Could Bitcoin support a country’s economy if it was the main currency? Most economists will say that it is not only impractical but impossible. They claim deflation discourages spending and can lead to people hoarding money knowing the value of savings will only increase over time. Businesses can suffer by earning less revenue as people spend less. This can cause businesses to renegotiate contracts to cut costs of production and lower wages. This, in turn, can lead to layoffs or shutdowns. This is called a deflationary death spiral. In a fiat economy, the solution is to print more money which will devalue the currency causing inflation. The idea is you will more likely spend it now rather than save it because – why would you keep something knowing the value will be less in the future?

Managing Deflation

On the other hand, in a deflated economy there will always be the need for basic necessities. People need to eat and have housing. They also tend to spend when it takes less to buy something or go on vacation. Most people want to do it or buy it now rather than wait.

The best-case scenario is for one to both buy and hodl Bitcoin as a store-of-value, but also use it as a currency. Find ways to spend small amounts where it is an option instead of using fiat. You should buy back what you spend because you know it is going to continue to increase in value. This will help it get more noticed and promote mainstream adoption, while at the same time increase your holdings.

In the future when Bitcoin is fully adopted and is a part of everyday habits there will be no worries about the value getting so high that even the smallest purchases will be impossible. A good example would be if the penny had so much value that you couldn’t buy something worth only a penny because it is the lowest denomination. Bitcoin has 8 digits beyond its decimal point making it possible to spend for even the smallest of purchases.

Bitcoin has been around for some time now and most people have heard of it. As economies struggle around the world, Bitcoin might be the answer to our highly overinflated fiat currencies.

 

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