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I figured out that cryptocurrencies can cause a deflationary spiral, since the cap is the same (eg. 21m BTC) but the economy is growing. That would only happen if all coins are mined.

But deflation would usually lead to a recession. Is there a way to prevent that?

I've done some research, like on the Bitcoin Wiki page deflationary spiral, but I don't seem to understand why deflation won't happen.

The ‘deflationary spiral’ is a real condition that affects the popular fractional reserve backing system. Bitcoin is not affected by this because it is fundamentally different from popular currency.

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Yes, cryptocurrencies that have finite supply are bound to create deflation. This is because the same finite supply of coins will represent an increased economic output that results from technological innovations. Thus the value of a coin is worth more tomorrow than today thereby increasing its purchasing power. However, if this deflation is bad is highly debated in the economic circles and there seems to be no concrete consensus on it.

The critic about deflation being linked to deflationary spiral stems from the great depression of 1929. The deflation in the economy post the great depression increased the real value of debt thereby compounding the problems of economic recovery. Moreover, because of deflation people hoarded money rather than spending it exacerbating the effects of recession. If you look at deflation from this lens then it could be deemed as hurtful as it prevents actions that could potentially stimulate the economy.

However, this can also be viewed from a different angle. We have seen the effects of deflation only in times when our economy was in trouble and there was a complete collapse of demand. Deflationary characteristics of Bitcoin is not based on collapse of demand, but a very predictable supply.

You will also see that a lot depends on the type of money used in the economy. Fiat money is based on debt: government issues bonds and the central banks buy these bonds by printing money. However, Bitcoin has properties that makes it resilient to credit expansionary forces thereby delinking it from public debt. Thus comparing the deflationary aspects of fiat money to the deflationary aspects of Bitcoin is like comparing apples to oranges.

Some people point out that deflationary nature of Bitcoin will lead to hoarding practices and hence lead to fall off in demand. I think it's a fallacy, since purchases related to houses, food, cars etc. will continue to happen. They help you make investments that could produce a higher return than the appreciation in the value of Bitcoin over the same period. For example, using a car helps you get to your office faster and be more productive, there by increasing your year-end bonus. I believe, only investments in assets that people currently invest to protect them from inflation (second home, gold, arts etc.) will reduce. Demand related to consumable/depreciable goods will continue to remain steady.

I'll sign off with a food for thought. The price of electronics gets cheaper every year, still you do not postpone the purchase of your electronic gadget in anticipation of price reduction as it helps you achieve other important goals whose return is higher than the price decrease over the same period. This can be extrapolated to the spending characteristics in hyperbitcoinized world.

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  • Deflation is an ongoing increase in the price of currency relative to some representative basket of goods and services. An ongoing increase in price can be caused only by an ongoing fall in supply or an ongoing rise in demand. An ongoing increase in output could plausibly, but would not necessarily, cause an ongoing increase in demand for currency.
    – WillO
    Feb 21, 2023 at 1:32
  • @WillO the question primarily focuses on the potential economic implications if everything were priced in Bitcoin. Considering Bitcoin's limited supply, any growth in economic productivity would result in an increased value of Bitcoin relative to a basket of goods and services. In this case, the deflation observed isn't due to a reduced demand for goods as typically seen, but rather because everything is denominated in Bitcoin, which has a finite supply
    – Ugam Kamat
    Apr 13, 2023 at 11:00
  • 1) If the supply of currency is fixed, then deflation can be caused only by an ongoing increase in demand for that currency. 2) If we were talking about dollars or euros, the usual argument is that increasing economic activity leads to more transactions, which leads to increased demand for currency with which to carry out those transactions. 3) However in the case of Bitcoin, the market for transactions in equilibrated by the transaction fee, which has no analogue in the markets for dollars and euros. (CONTINUED)
    – WillO
    Apr 13, 2023 at 11:25
  • (CONTINUED) 4) So it is not clear to me that an increase in economic activity has to increase the demand for Bitcoin. Maybe there is a good argument to that effect, but it can't be the same argument that applies to currencies without transaction fees.
    – WillO
    Apr 13, 2023 at 11:58
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The question isn't whether demand will fall generally with bitcoin. The question is, what will happen in a recession with bitcoin as the only currency? I believe if bitcoin is the only currency, most recessions will result in depressions, because there is no mechanism to get people to spend. People will hoard because of fear, and that will exacerbate the recession, causing a depression.

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  • Can recessions be "with bitcoin as the only currency"?
    – Mercedes
    Feb 26, 2023 at 12:17

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