Could Bitcoin Cause Hyper-Deflation?

Most have heard of hyper-inflation. This is when the annual inflation rate exceeds 50%. While it has not happened on a global scale, there are instances where it does take place. Presently, Venezuela is a country experiencing the effects.

Essentially, inflation is noticed in the increase in price of goods and services. When a product such as a gallon of milk goes from $2 to $3, we say it inflated by 50%.

Inflation is caused by too much money chasing too few goods and services. Many believe that this is a result of printing too much money yet that is too linear. Like all things with the economy, a holistic approach is needed since there are many variables that enter the picture. Supply, demand, wages, and affordability all play into this equation.

Of course, over the last 30 years, we are seeing technology becoming a bigger variable.

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Deflation is the exact opposite. If we want, we can state that it is caused by too little money chasing too many goods and services. This could obviously result in the drop of prices.

People have an odd view of inflation and deflation. We are taught that inflation is bad. Thus, we believe, deflation is good. Oddly enough, economists mistakenly believe that deflation is bad.

The idea behind the hate of deflation is the belief that people will put off purchases knowing they will be less expensive down the road. When we are looking at discussions of this nature, it is best to ignore the theorists and academia (which economists are) and focus upon how the market truly answers the question.

If deflation is a bad thing since people will not purchase, how can we explain computers, televisions, and mobile phones? Everyone knows that each of these products will be less expensive a year or two from now while offer more features than the present models have. Yet, oddly enough, most everyone purchases these devices.

In fact, the epitome of this is the semiconductor. The basis for Moore's Law, we have see a halving in price every 18-24 months. This has been in place for more than 60 years.

Ironically, while economists will tell us that semiconductor purchases will be delayed, the industry has a CAGR of 14%. Not only is the industry not slowed, it grew at an annual rate of 14%, for decades.

The bottom line is that excess inflation or deflation is the problem. Throughout history, in the western world, deflation is rare. There were only a couple instances where we saw this take place. The best known was the Great Depression which saw deflationary pressures for a few years. Most recently, the Great Recession had a brief period of deflation, led by the rapid drop in oil prices.

This brings us to the concept of hyper-deflation. Few have heard this term because it is mostly theoretical. I cannot find an instance where this took place yet we could end up seeing it in the next decade or two.

From what I can garner, there are two potential factors which could cause this.

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One is the impact of technology. With the radical advancement that we are seeing in this area, it is possible that the deflationary pressures mount to the point where prices are dropping like a rock. This will not necessarily be caused by other outside factors. Instead, we see so much progress and things evolving so quickly, that what was standard a year before is now passe. As AI and robotics expand, this could become a reality.

However, another factor is one that is not mentioned too often, especially in the cryptocurrency realm.

Many discuss Bitcoin as being the, as Jack Dorsey says, money of the Internet. If this is the case, we certainly will have hyper-deflation.

Consider the idea of Bitcoin being used for transactions and couple that with the cause of deflation. Deflation is essentially too little money chasing too few goods and services. Think about Bitcoin and the fact that it has a cap on the number of tokens. Bitcoinists tell us this is a good thing.

However, there is another factor to consider. With Bitcoin, a result of an increase in price will be that purchasing power is enhanced. This is good, right? From a growth perspective, not really. What essentially happens is that people do not spend, instead people opt to hold onto money believing that it will appreciate in value. Again, leaving theory aside, this is what we see in the market.

Ponder the idea that Bitcoin could 10x from the point it is at now. This is a level most who are favorable to Bitcoin would agree is reasonable. If that is the case, why would anyone spend any Bitcoin they have? Ultimately, it is going to be to buy 10x more than it is today.

A 50% increase in the price of Bitcoin each year is well within reason. From the present levels, this would put it at $14,000 in a year. After that, by mid 2022, we would see a price of $21,000. Following this further out, we see $32,000 in 2023, $48,000 in 2024, and $72,000 in 2025.

Certainly, this is not the most outrageous predictions for the price of Bitcoin. We are a long way from the forecast of $1 million BTC which some are predicting.

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Which brings us back to the money question. If Bitcoin is going to be used as money, how would it facilitate transactions when people are hoarding it? Without the ability to expand, the only other factor is price collapse. Businesses would have to drop the prices through the floor to pry Bitcoin from people's hands.

For this reason, I think it unrealistic to expect Bitcoin to be the main, or even dominant, form of money. Instead, the hyper-deflationary impact that Bitcoin exerts will be offset by the overall inflationary pressures that come from cryptocurrency in general. People will have the opportunity to collaborate in thousands of different tokens.

By the end of this decade, there will be no shortage of money. Couple that with the advancement into the digital world, and we will see no shortage of places to spend that money.

This is why abundance is going to be upon us.

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Posted Using LeoFinance