Connor Brown wrote on Medium a long but good argument as to why it is necessary to tinker with the idea that bitcoin is deflationary. This is necessary if the world ever wants to move towards a bitcoin standard.
Bitcoin is not deflationary
He first discusses the concept of deflation, and then makes the link with bitcoin.
Rising prices are popularly called inflation, and falling prices are therefore called deflation. But formally, deflation means a decrease in the supply of money, or money substitutes.
Deflation is not a price drop itself, but a monetary phenomenon that sometimes leads to falling prices.
In this sense, bitcoin is not really deflationary. The supply of bitcoin is not decreasing, but will only continue to rise until the rewards for miners run out around 2140. At that time, bitcoin will reach a hard limit of 21 million bitcoins.
You can see that below: in the beginning, inflation is high, but it is slowly decreasing until 21 million bitcoins have been issued.
Brown writes that the bitcoin protocol is not non-inflationary or deflationary in the long term. Bitcoin is precisely written as disinflation, with the aim of maintaining a constant monetary base without changing the supply.
Lost coins play an increasingly smaller role
He also discusses the role of lost coins on the total offer. Over time, storing bitcoin becomes more professional and user-friendly. This ensures that fewer and fewer coins are lost. You could even say with certainty that most coins were lost in the start times of bitcoin. This number will only decrease.
So as fewer and fewer new bitcoins are added, the supply of lost coins also decreases.
Wages do not fall in a bitcoin world
Another determining factor is the demand for bitcoin. Brown measures that on the basis of population growth. This will slow down as more and more countries and cultures are urbanizing and there are more training opportunities.
In addition, Brown also looks at how falling prices affect incomes in a world where bitcoin is fully accepted. He compares how production goods are made increasingly efficient, and therefore can become cheaper. That does not apply to man-hours. That is the only scarce commodity that always remains scarce. According to Brown, the price of man-hours will always remain appreciated.
Incentive to spend bitcoin instead of keeping it
He also addresses another important point that many now worry about. Are bitcoins actually issued or will they remain in the hands of Hodl’ers? Brown expects that because people can keep their value in bitcoin, and prices fall, this will actually lead to more expenses. After all, purchasing power is increasing so you can buy more with less.
His final point concerns our current monetary policy, where it is common to pump more money into the economy and lower interest rates. He comes up with good arguments why this can only lead to disastrous long-term consequences. And that this policy only makes it more difficult to recover from a recession.
Bitcoin does not completely solve these credit cycles, but it does ensure that the fall is much less difficult, because bitcoin is not dependent on the policies of central banks.
Conclusion is an argument for plan ₿
He concludes that the stock of bitcoin is not deflationary. The money offer is programmed to be constant. As the world of the future shifts towards a bitcoin standard, our new monetary base will become more stable and sustainable than ever before. Prices will fall because people are more productive, while no artificial injections from central banks are needed to sustain the economy.
Read his full post here.