Deflation is distinct from disinflation, an inflation rate at a slower pace. Being deflationary means that the money supply decreases over time. The opposite is inflation when the money supply increases over time. You can also diversify your crypto portfolio on the official Bitcoin Circuit site where you get access to trading other cryptocurrencies. In Bitcoin, the money supply decreases over time due to the way bitcoin works and its deflationary nature.
This deflation results in a rise in the purchasing power of money referred to as economic deflation. Deflation is a crowding-out effect when the money supply declines, as with Bitcoin. The price increase will push out competitors and result in outsized profits for firms that can maintain their prices.
It pushes consumers away from their competitors, raising demand for the products and services of the firm. As firms see an increase in demand, they are incentivized to raise prices to take advantage of the situation. Deflation can lead to a significant increase in economic output when applied on a large scale.
What Is Deflationary Cryptocurrency?
A cryptocurrency incurring a depreciating money supply is called deflationary currency. It is similar to regular fiat currencies in their creation, distribution, and control. Most cryptocurrencies also fall under the category of deflationary cryptocurrency as they are generally a currency with a fixed supply. Its fixed money supply sets bitcoin apart from other forms of cryptocurrencies. It was created deflationary for the idea of a currency without inflation.
Why Are Deflationary Cryptocurrencies Created?
The Internet has opened many doors for us to face competition in different sectors such as business, sports, education, and entertainment. Its change has resulted in a shift in consumers’ purchasing habits, preferences, and choices different from those that existed even five years ago. Consumers’ expectations of businesses have also shifted to an extent where they expect businesses to provide them with high-quality products at affordable prices. In response to this situation, businesses have focused on customer retention by providing better-quality products at lower prices.
How Does Deflation Impact The Price Of Goods And Services?
To understand this concept, we must first examine how a fixed amount of currency is used to buy a specific good or service. Let’s say there are 100 units of currency available in circulation, and a consumer needs 5 units to purchase a particular good or service. The remaining 95 units must be left unused and have no purpose except buying a said product when they are needed again. It means 95 units are idle, which generates no value for anybody. If people offered all the 95 units for sale, there would be no buyers and no sale, i.e., no economic activity. This situation is what we call deflation.
Deflation Is A Crowding Out Effect
This concept explains why businesses adopt deflationary pricing. The economics of it is simple; they realize they can make more money by keeping prices low than by raising them once demand increases. Businesses can take advantage of this situation as people find better things to do with their assets than buying goods and services. It leads to a shift in consumer preferences, resulting in the goods not being sold. Deflationary Pricing Is Good For Businesses
Businesses can either increase the number of goods they sell or raise their prices. If they do so by raising the number of goods, this pushes out their competitors and allows them to capture more market share because consumers have no other place to go for these products. However, when one business does this, it forces others to maintain sales volume and keep up with demand. Ultimately, the customers get a better product at a lower price.
Why is bitcoin deflationary?
These are some reasons why bitcoin is a deflationary cryptocurrency that works on supply and demand mechanics, but it is not limited to these points only. There are more theories and factors explaining why deflationary tokens are created.
These include
(1) the idea of a currency is considered a medium of exchange and a store of value, bitcoin’s current price is equivalent to only that of the expensive transaction fees associated with other payment systems.
(2) The main reason bitcoin could be considered deflationary is its fixed money supply. It has been designed to eliminate inflation which can result in loss of purchasing power and increase capital gains taxes.
Bitcoin is considered a deflationary currency as it uses a deflationary money supply approach to create new units of money. Bitcoin was created in 2008 to create a decentralized digital currency that any person or entity can’t control. The increase in BTC from mining will decrease over time as it reaches a block reward reduction threshold of twenty-one million BTC in 2140.
It is said that cryptocurrency, which uses a deflationary money supply approach, has its pros and cons as well; for example, it may result in some people hoarding their assets and not spending them, whereas the ones who spend, save or invest may do so early. But on the other hand, this can result in an overall increase in economic activity because a reduced money supply may result in increased consumption of goods and services.
