Deflation Versus Inflation In Currencies

09 Mar, 2024

Jesse Myers

Author

Occasionally, critics of Bitcoin will assert that inflation is necessary for a currency -and by contrast, that a deflationary currency simply won't work.

Here's the typical objection to Bitcoin's deflationary properties: You can't use a fixed supply currency because the currency gets more expensive over time and that destroys the economy.

This is wrong for several reasons.

Clarifying terminology

Before we get into it further, it's worth establishing what we're talking about here: inflation vs. deflation in a currency.

An "inflationary" currency means that you have to spend more units of currency to buy the same thing over time (have you ever compared a menu of prices in dollars from the 1970s vs. today?). Conversely, a

"deflationary" currency regime is when prices deflate over time and each unit of currency buys you more, not less.

The US Dollar is an inflationary currency - more and more supply is added over time, which means the nominal prices of goods go up over time. Bitcoin is a deflationary currency - because there's a fixed amount of supply, the growth of the economy + any coins that are lost over time result in the nominal price of goods going down over time.

The US Dollar is inflationary; Bitcoin is deflationary.