How is Bitcoin anti-inflationary?

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So what does that mean?

Bitcoin’s decentralized nature ensures a more stable currency as central governments, like other currencies, cannot inflate it and are prone to do through interest rate hikes or quantitative easing programs. The foundation is also built upon an algorithm that rewards its users with interest for holding bitcoins. Bitcoin was the first digital currency out on the market, but since its inception, other digital currencies have been developed and have since risen in popularity. The most popular are Ripple (XRP) and Ethereum (ETH).

What makes bitcoin unique is that any specific institution does not own it. It is a decentralized network, and in doing so, it eliminates the possibility of a central authority to account for transactions that introduce more risk into the system. That said, users cannot pick up bitcoin’s inherent anti-inflationary nature at first glance. Inflation, as a concept, could be defined as an increase in total money supply beyond what is computed by economic growth. Let’s discuss in detail why bitcoin is anti-inflationary.

What is inflation?

Inflation is an increase in the money supply of a country. It is when there are more dollars available than what the country produces. When inflation occurs, money’s value decreases, and you need more dollars to buy stuff. For example, if you made $50,000 per year and had to pay $30,000 for a house that cost one million dollars last year, this year when you make $50,000 again but now that house is worth 1.5 million dollars so you’d have to pay 1500000 (1 Million + 500k) to get it!

So inflation occurs when more currency enters into circulation than what your economy can produce by way of goods and services. Economic growth, measured as the growth in Gross Domestic Product (GDP), is a function of supply and demand.

As demand increases, more goods and services are needed to be produced and supplied to the market, increasing production costs (inputs). In addition, an increase in government spending or investment from the private sector can expand the money supply. It is further compounded by speculative investments into assets like real estate or stock markets, creating an exuberant environment for prices to soar rapidly. In other words, a problem occurs when money enters circulation faster than what is available to purchase goods and services.

Why is bitcoin anti-inflationary?

1. Bitcoin’s capped supply:

Bitcoin has a limited supply, meaning the amount of bitcoin in circulation is fixed and cannot be increased. The total number of bitcoins that will ever exist is 21,000,000 (twenty-one million). It is regulated by an algorithm that sets 10 minutes as the average block creation time (which yields one block every 10 minutes) and limits the number of bitcoins mined per block. The algorithm is programmed to become more complex as more bitcoins are mined.

2. Bitcoin’s decentralized nature:

Bitcoin’s decentralized network and built-in algorithm make the currency inherently resistant to inflationary pressures. No central bank or governmental authority can manipulate bitcoin’s supply as has been done to some of the world’s other currencies through quantitative easing programs such as the US Federal Reserve or Bank of Canada, which has made inflationary pressure possible in those currencies. Bitcoins do not have that same advantage because no central banks or monetary authorities can influence the currency’s supply by either buying it up (quantitative easing), simply printing more, or even increasing interest rates.

3. Can the bitcoin supply be increased?

The answer is no. The algorithm regulating bitcoin’s supply has an upper limit of 21 million bitcoins that can ever be mined and regulates yield by making mining increasingly tricky. Even if a community wanted to increase bitcoin yield, it would be impossible because the algorithm cannot be altered or tampered with due to the bitcoin community being decentralized and open source to everyone.

They are verifying transactions and adding them to the blockchain yields bitcoins (instead of just producing blocks), which involves hard work and computer power. The only way the upper limit of bitcoin can incline is if 51% of the bitcoin investors and miners agree. Still, investors will only agree if this happens, the demand for bitcoin will remain high, which will further reduce the price of bitcoin.

Government has no control over the supply and utility of bitcoin

The supply of a currency is the number of units available in the market, and here we see that the government has no control over its collection through the central bank. The government is trying to do this by reducing interest rates, which reduces the spending power of money and induces inflation. It is because people are more inclined to spend as they get more money in their hands and would instead save it, reducing overall liquidity and lowering demand, thereby reducing inflationary pressure on an economy. If you think about it, bitcoin’s anti-inflationary nature is advantageous compared to other currencies (viewed from an economic perspective).