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The idea of a currency with a limited number of units seems to me to be fundamentally different to existing currencies. While other currencies are generally based on permanent inflation - more 'units' coming into the currency pool - which causes each unit to be worth less, Bitcoin is based on a fixed number of 'units', never changing. Does this mean that, as usage increases and time passes, each 'unit' will necessarily be worth more and more and have to be split into smaller and smaller amounts?

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    "Are Bitcoins destined to forever increase in value?" Looking at the chart at MtGox over the last month: apparently not.
    – Thilo
    Commented Sep 9, 2011 at 9:02

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In theory yes. If demand grows at a steady rate this will certainly be the case, as less coins will be produced making what is available more desirable.

In reality there are other factors which could affect the value of bitcoins.

  1. Alternate chain could supersede bitcoins (unlikely at this time)
  2. Vulnerabilities like what has appeared (with hacking) already in the main markets
  3. Overspeculation of market trends

Think of it more like gold than a fiat currency in the likelihood of behaviour (nb. my opinion, may not be the case)

If the value does keep increasing it can split into eight decimal places to make a very large number of potential units of currency.

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This generally boils down to supply and demand. When the supply is fixed the value would increase with the demand.

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If demand continues to increase and supply is constant, then yes. But supply is not going to be constant, that's a wholly unrealistic assumption. Already, alternative currencies and online wallet services are increasing the effective supply of Bitcoins.

If an Altcoin is reasonably predictable valued at .1 Bitcoin, why should I care whether you give me 10 Bitcoins or 1 Altcoin? (The value might go up or it might go down, but so long as they're equally likely, I don't much care.) Thus each Altcoin increases the effective supply of Bitcoins.

Similarly, I don't care if you give me 10 Bitcoins or a Mt. Gox code to claim 10 Bitcoins. Thus Mt. Gox codes act as Bitcoins as well.

Once shorts are available, interest-bearing accounts will be possible. This will allow the two sides of a short to cancel out, require no bitcoins, and the long side will also act as a supply of Bitcoins. I may consider a promise to pay 10.2 Bitcoins next month just as good as 10 Bitcoins today. I may consider a promise to pay the value of 10.2 Bitcoins next month in US dollars just as good as 10 Bitcoins today. (Assuming both promises are backed by an exchange and tracked as exchange assets.)

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  • Alternative blockchain-based currencies tend to cannibalize each other, as there's only a small group (relative to Bitcoin) of speculators involved in them. When a new alternative is created, it tends to drive the price of the other alternatives down without affecting the Bitcoin price very much.
    – Chris Acheson
    Commented Sep 1, 2011 at 11:05
  • That's true today, but I don't think that will be true forever. But I guess we're arguing over whose crystal ball is clearer. Every argument why I wouldn't want Altcoins instead of Bitcoins is an argument why someone would be willing to give me more of them as well.
    – David Schwartz
    Commented Sep 1, 2011 at 11:08
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    This probably isn't the place to argue the point, so I'll just phrase it this way: if blockchain-based currency is a natural monopoly, then the creation of a Bitcoin clone won't affect the price of bitcoins. Also, in the case of bitcoin-denominated debt (claim codes, shorts, etc), the amount of outstanding debt should be roughly proportional to the supply of currency, so this wouldn't represent an ongoing source of inflation either.
    – Chris Acheson
    Commented Sep 1, 2011 at 11:25
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Although limited total number of bitcoins implies that they will be deflationary in the future. Meaning they will increase in value due to limited supply. They are currently inflationary as about 7200 bitcoins are released into circulation every day. This trend will continue for some time before supply starts to slow down.

This means that there is a great deal of downward pressure on the value of bitcoins (lots of supply). This could lead to the prices going down long before they go up again due to limited supply.

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The will go up in value as long as more people continue using them and the demand outpaces the creation of the supply. But once the market is saturated (i.e. the whole world) then the value of bitcoins would become stable, and would only move by market conditions such as a change in the world population, and lost bitcoins which are effectively disappearing from the system will contribute to a continued trickle of deflation.

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    This is correct, adoption (and therefore value) will tend to follow the pattern of a Sigmoid curve. However, rising value is referred to as deflation, not inflation.
    – Chris Acheson
    Commented Sep 1, 2011 at 11:09

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