Bitcoin and the Deflationary Spiral – a Double Edged Sword

There have been multiple mentions of bitcoin ending up in a deflationary spiral on the long run. At a bird’s eye view for a layman, it sounds true. However, if one takes some time to study bitcoin and understand it in details, it will become obvious that the digital currency is quite different from conventional fiat currencies, and the deflationary spiral that seems perfectly applicable to fiat currency at certain circumstances doesn’t apply to its digital counterpart.

For those who do not know about deflationary spiral, it is an economic concept which states that continued deflationary trend will lead to reduced prices, increased production and increased value of the currency with respect to the purchasing power. The increasing value of currency, combined with reduced prices will lead to a fall in the circulation of currency and ultimately its demise.

Theoretically, those who argue that bitcoin will go down the deflationary spiral, believe that with the number of bitcoins already fixed, its value over a period of time will be proportional to its demand within the same timeframe. With everyone believing it, they will end up hoarding bitcoin expecting the value to rise in the future. Mass hoarding will take bitcoin out of

Read more ... source: TheBitcoinNews

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