The key to currency stability is to have neither too many nor too few of a currency in circulation. So what is the "Goldilocks" area going to be if Bitcoin really catches on and everybody wants to use it?

Could it turn out that demand will outstrip supply of the coins, resulting in inflation? Has this already happened?

It seems to me that if a popular retailer like Newegg were to begin accepting Bitcoins then this could cause a spike in use and inflation.

  • 1
    This question has several assumptions that are wrong, there is an excellent interview about Bitcoin that I think you should watch youtube.com/watch?v=OtN9YUvh_XM
    – Serith
    Sep 27, 2012 at 4:00
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    A spike in use would cause deflation. Sep 27, 2012 at 10:38

2 Answers 2


This question would be better for Economics SE, if it was still around. But oh well.

You can't really prevent short-term inflation and deflation spikes, as anyone with substantial enough money supply could sway the economy until it balances itself out. Also, a similarly rich person could cause the Bitcoin to rise and fall in value in a pump-and-dump cycle by buying Bitcoins over a long period of time, and then spending them all at once for profit. Rinse, repeat.

For a long term, you'd need to generate Bitcoins at the same rate as the Bitcoin economy grows. As the value would be really hard to estimate, setting it in advance would be impossible.

The main way I can see Bitcoin having a stable-ish value while allowing for the economy to grow and shrink would be through the use of a system akin to Digital Coin. Generally, the idea is that everyone could be creating their own currency that would be exchangeable for Bitcoin at a varying rate. The rate would vary based on the supply and demand of the private currency. There are a few mechanics to encourage people to use the private currencies, which I won't go into detail here. In this scenario, Bitcoin will be used as a standard of value - meaning everything will be compared to Bitcoin, but actual Bitcoins wouldn't be spend under normal circumstances. This way, Bitcoin in most cases wouldn't undergo inflation, but the economy built around it could.


Has demand already outstripped supply?

Yes, in fact it happens hundreds of times each day. The evidence of this happening comes with each uptick on the market price ticker.

What I mean by that is that with a currency that floats there is a limited supply at a certain price point. Once those are sold and no new sellers wish to sell at that price, then those representing demand will consider buying the supply that is offered at a higher price. When that happens, demand has outstripped the supply at the lower price.

Now some people use Bitcoin as a payment system without holding coins themselves. So for them, it doesn't matter what the exchange rate is. If they are to send $50 worth of bitcoins today, it costs them about $50-ish to buy the coins and to send them. A year from now, to send $50 worth of bitcoins, it too will cost about $50-ish to buy the coins and send them then as well.

So the ones who will be impacted by the fluctuations in the exchange rate are those who hold the coins. These include speculators. Though speculators do use the Bitcoin network to transfer funds, their transaction aren't necessarily supporting the Bitcoin economy -- they are simply speculative flows.

Merchants too can have their proceeds from sales converted to fiat so as to avoid exchange rate risk.

So even though there is and will continue to be exchange rate volatility (or price inflation and price deflation for product pricing), those preferring to not be exposed to that risk can easily avoid it.

As far as exchange rate volatility affecting prices, technology has already mostly solved this problem. A customer traveling in a foreign country can check prices using a currency conversion app on a mobile, for instance. The merchant generally deals only with the local currency but at checkout the amount is converted to the customer's currency using a conversion rate. There's no reason Bitcoin needs to be treated any differently than being just another foreign currency.

The amount of currency that exists at any point in time at the present and future is known, so that should lessen the amount of fluctuation that comes from market uncertainty over whether or not monetary policy will be inflationary or not.

Knowing the currency won't be debased adds to Bitcoin's stability.

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