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I see people everywhere saying that bitcoins are immune to inflation but nobody has explained it adequately to me. I understand why bitcoins would be more or less immune to inflation cause in increased money supply - because there's a fixed money supply forever. But what about hyper-inflation caused by confidence crisis?

Any currency have worth if people are willing to accept it. And how much would a bitcoin be worth is exactly how much goods would people accept to trade for one unit of bitcoin. If for any reason people start to think that bitcoins are worthless, its buying power will diminish and you will have inflation! I don't see how this can be avoided.

Is there something I'm not seeing? Where's the catch? Why are bitcoins immune to inflation?

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I believe the confusion comes from inflation sometimes meaning "monetary inflation" (instead of price inflation), which only refers to the amount of coins in circulation. Otherwise, it may have been claimed by people who falsely believe the Bitcoin-to-traditional currency exchange rate will only go up over time. –  Pieter Wuille Jul 12 '12 at 21:57
    
I am not sure about the inflation aspect of bitcoins but it is a way too volatile for my liking. A change of $200.00 in one night is to much. I will stick with my precious metals for now. ;>] –  user10842 Dec 15 '13 at 0:29

7 Answers 7

Specifically, bitcoins are immune to M0/MB inflation, meaning that the money supply itself does not inflate, except at the very beginning (which we're still in) while the original 21 million BTC get distributed via the mining process. Once 21 million coins exist, they become deflationary since no new coins are issued and, as naturally occurs, money falls out of circulation as wallets are lost.

Bitcoin could still suffer the kinds of inflation most currencies see in M1/M2/M3/MZM such as fractional-reserve banking, but the idea of a publicly published block chain is that at any moment it should be trivial to audit a bank and ensure their deposits are correctly recorded. Essentially, any institution practicing fractional reserve banking should be much easier to spot and those who dislike such practices can more easily walk away from them. There are complications to this model, but that's the ideal anyway.

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The problem is that most people like such practices (because they're much more efficient) and so they won't walk away from them. This is a good thing though -- a fixed supply that can't respond to demand is a bad thing. Money, like every commodity, works best when the supply can adjust efficiently to the demand. (The people who don't like this are primarily people who want to make other people act against their own interests just so that they personally can make a large profit by not doing anything but holding money.) –  David Schwartz Jul 13 '12 at 2:31
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True, the combination of a deflationary M0 and inflationary M1-3 money supply would allow for bidirectional adjustments to the overall money supply, rather than inflation at every turn like most governmental fiat currencies. The goal shouldn't be inflation or deflation but stability, and without any deflationary mechanism I have a hard time finding a mechanism for such stability. –  David Perry Jul 13 '12 at 3:38
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You can create flexibility in your working capital even when your monetary base is fixed. You issue real bills that are basically countersigned invoices with their own secondary market. See: en.m.wikipedia.org/wiki/Real_bills_doctrine This was used very effectively by Britain whilst on the gold standard up until around 1900. –  jim618 Jul 13 '12 at 6:31

This paragraph from Wikipedia explains the confusion:

The term "inflation" originally referred to increases in the amount of money in circulation, and some economists still use the word in this way. However, most economists today use the term "inflation" to refer to a rise in the price level. An increase in the money supply may be called monetary inflation, to distinguish it from rising prices, which may also for clarity be called 'price inflation'. Economists generally agree that in the long run, inflation is caused by increases in the money supply.

When people say that Bitcoin is immune to inflation, they are referring to monetary inflation since there will never be more than 21 million bitcoins.

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The Money supply with Bitcoin is designed to increase in value. Effectively the money supply grows by allowing the prices of goods and services to fall to fit the amount of Bitcoin required.

Yes this encourages saving. But saving increases the value of Bitcoin, making prices fall further, until prices are so low people are willing to spend their savings/wages. People are also (at some point) willing to take lower wages, because in effect those wages are more valuable.

Eventually, people are comfortable with their savings, and they invest their savings, and spend their savings. Loans from banks are less necessary, because the wealth of people in general has increased.

Bitcoin is designed for this process by being easily divisible to 8 decimal places. You can literally give someone .00000001 of a Bitcoin. For the foreseeable future, Bitcoin can expand in value to meet the needs of any Economy.

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Yes, bitcoin won't be immune to inflation at M2 level, just like Chinese RMB, its M0 is only 5.5 trillion, but its M2 is 97.5 trillion. If only BitCoin-denominated bonds issued by bitcoin banking facilities.

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The term “inflation” without the adjective “monetary” is generally accepted by the public to mean a decrease in purchasing power, so it is generally applicable to any market condition which can lower the purchasing power.

The single-word for monetary inflation is “debasement”. Bitcoin's debasement is preset to decline geometrically to asymptotic maximum of 21 million coins.

So Bitcoin has both potential for general inflation forever, and also monetary inflation is assured for some time.

It is quite naive to claim that Bitcoin isn't subject to inflation. An (eventually) non-debased currency is not superior long-term. Many gold bugs have this irrational delusion (I used to too) which does not fit the unarguable facts of economics and history (you will need to click down the link hierarchy to get all the facts, it is not reasonable to copy all that into this answer).

Btw, until 2033 the biggest threat ahead is not inflation, rather it is confiscation of wealth a.k.a. capital controls and nearly certain world war due to the repeating 78 year boom&bust cycle of technological unemployment (prior 26 year bust was 1929 - 1955).

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Suppose people raise bitcoin prices they're charging for goods and services. They'll be asking for more bitcoins than their customers have, because the supply of bitcoins is limited. Rather than people generally paying more for stuff, they'll just buy less stuff at higher prices, or pay for it with other currencies since they just don't have the bitcoins. If they ask their employers who pay them in bitcoins for higher pay in bitcoins, the employers just won't have enough bitcoins either, so their employees will leave them for lack of pay unless they get paid in other currencies.

In "inflation" as I usually think of it, the merchants get the higher prices they're asking for and the employees get the higher wages they're asking for. With general price increases in bitcoins, that couldn't happen because the bitcoins needed to pay those amounts wouldn't exist. Is that "inflation"?

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No, they are not.

Like others have mentioned, prices can increase in size, even if the total amount of Bitcoins that will be created is limited. The main problem is that there are other currencies.

In spite what others have mentioned, the limit of 21 million Bitcoins can be eliminated. In fact there are people who support the idea already.

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-1 This answer doesn't contribute anything new/useful to the topic. –  Murch Jan 8 at 18:32

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