As bitcoins are mined are older bitcoins retired? If not, how is monetary inflation prevented? Wouldn't the additional bitcoins cause the overall value of bitcoins to be deflated?
2 Answers
Bitcoins are created at a predetermined rate. Until this rate drops to 0 (around the year 2140), the supply of bitcoins is increasing. If this isn't offset by destroyed/lost coins and increased demand, some amount of inflation will occur. However, I'd expect the inflation rate to be low (if positive at all), and getting lower.
Once all ~21 million bitcoins are mined, no more will ever exist, so inflation will cease entirely, and only deflation can occur (again, as bitcoins are lost or intentionally destroyed). There are currently ~12.7 million bitcoins in existence, so at most, inflation will make 1 bitcoin today worth ~1.65 bitcoins in the future.
-
Still that 0.65 increase would make the bitcoins I purchase worth less by a large factor. Is this amount of inflation so low that people are not concerned?– webwormCommented May 15, 2014 at 15:57
-
I think that's right. Remember, this is over a very long period of time, so it doesn't take much demand or loss to make up for it. The highest rate of supply increase is right now (it's always decreasing, so of course it is), and in the period of time until the next decrease (projected near the end of 2016), the supply increases by roughly 8-9% per year (there'll be 24% more in ~2.6 years, x^2.6 = 1.24, x ~= 1.086). This is the maximum possible inflation rate for this period of time. I think that other forces (e.g. speculation, use, regulation) are far more significant.– Tim S.Commented May 15, 2014 at 16:09
-
@webworm Because everyone knows what the supply will be, it already made the Bitcoins you purchased worth less when you bought them. All other things being equal, the price of Bitcoins is lower today than it would be if the mining were going to end sooner. When you bought your Bitcoins, you paid a price you and the seller both deemed fair, and the entire market knows the rate at which Bitcoins are produced. Commented Jun 15, 2014 at 9:29
First of all, there's nothing wrong about some inflation or deflation in general. You can hear lots of flame from various economists, some of them trying to persuade you that a small inflation is beneficial or even essential, but this is not necessarily true (one example is IT hardware market).
OK, that was just a note to calm down and think first when somebody is talking about inflation or deflation and keep in mind that there are different views on this, depending on various stuff, including philosophy or religion beliefs.
Second, there is a difference in inflation in nominal amount and a real value. While Bitcoin is unarguably inflational in the sense of total units of currency "minted", it is expected to be deflational in sense of real value. The reason is quite simple: the market growth is expected to be much bigger than the preset currency supply. If that is good or bad, that depends on your point of view :-)
