## Why bitcoin is not inflationary?

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I understand that a lot of people today stack Bitcoin instead of spending them and that makes sense because there is a limited number of bitcoins.

However, I think that for bitcoin to be a real currency that people use everyday there should not be a limited number of bitcoin so people could freely spend them without to care.

Why bitcoin was made this way with a limited number of bitcoin ?

Question was closed 2017-09-22T22:46:47.347

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If one could simply "print more" Bitcoins, then it would quickly lose its value (this is the definition of inflation btw) because of increased supply. This is the main reason why, for instance, the USD has lost so much value in the last 50 years.

People invest in Bitcoin because they think it will increase in value, not because there is a limited supply. Lots of stuff is limited, but have no value.

Throughout history, inflationary currencies (ie currencies without a cap) have all lost their value and collapsed. This includes thousands of fiat currencies and will most likely include the ones we're using today.

You say that money must be inflationary for it to work?

Well, gold is not inflationary but has been used as currency for thousands and thousands of years. In fact, it was used as world currency up until 1971. Apparently gold worked, right?

Consider this... Two villages. One produce fish and the other coconuts. They buy from each other. They each have 10 Bitcoins each. Let's print more Bitcoins -- let's double the number of coins and give them out to each village! They still produce the same amount of fish and coconuts. What's going to happen now? Yes, the price of fish and coconuts will double! In effect, the value of each coin just got cut in half. That is the effect of (uniform) inflation. (*)

Or, simply put: If every person's bank account is doubled, then all prices will double as well. So changing the amount of currency uniformly like that is pointless. Nothing really happens.

But wouldn't a non-inflationary currency cause prices to drop (and, thus the currency value to raise)?

You're correct! But there are forces which work to counter that effect. Let's look at gold again:

On a fixed gold standard, prices would indeed fall slightly year by year. (By the way, this is fundamentally a good thing).

The reason prices fall is because the amount of goods increases due to increased productivity while the amount of gold stays the same. In other words, prices go down while the price of gold goes up. But (and this is important!) higher gold prices also gives gold miners strong incentives to mine more gold! So more gold is produced which enters the economy. More gold in circulation will eventually lower the gold price (and raise prices again) until miners don't earn enough and they stop mining. Which leads to higher gold prices (ie lower prices of goods) AND... the cycle repeats again.

And that is why prices on a "fixed" money base stays stable.

The stuff you just read (above!) about applies to Bitcoin a well, but there is a huge problem:

The Bitcoin price is not even remotely predictable.

I agree that it wouldn't be wise to buy one pizza with Bitcoins today, when you can buy 10 pizzas tomorrow. You see, for us to call something money, it has to to be stable. Otherwise, it's impossible to make economic calculations. So until (if) Bitcoin becomes stable, no-one is going to use it as money for practical reasons.

So for the time being, you should consider Bitcoin an asset for investment, not money.

(*) This is extremely simplified, particularly as I ignore the harmful Cantillon effect. Inflation (money supply increase) in the real world, causes enormous amounts of problems, one of which is that it acts taxes the most unfortunate of us.

But so you say that people invest in Bitcoin because they hope it will increase in value. So no one will use it as a currency right ? – Mike – 2017-09-14T13:09:21.863

I see no contradiction there. My guess is the underlying (long term) value is that it may, someday, be used as a major currency. It's the same case as for gold really. Except gold was indeed used as the world currency until pretty recently, 1971 in fact. – Martin Wickman – 2017-09-14T13:18:51.390

I agree that Bitcoin looks really close to gold and that makes it a great store of value for people but I just think that it goes against the idea of a currency, don't you think ?

Why should I spend the bitcoin I have today as I know that there is less and less bitcoin ? I will never buy a pizza or anything with my bitcoin that would be counter-economic effective.

For me this goes against the idea of Bitcoin as a currency and I do not understand it :) – Mike – 2017-09-14T13:24:19.667

Alright, I updated the answer. In short, you're correct that Bitcoin is not a currency (at the moment) but not for the reasons you think. :-) – Martin Wickman – 2017-09-14T20:34:10.047

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there should not be a limited number of bitcoin so people could freely spend them without to care.

Because of its limited supply, the people who have them think before spending. All the radical expenditures which large economies make are because there is no short term implications on such because the shortage of currency can be taken care of by printing more of it. But on the long term, when the expenditures don't bring results as expected, the devaluation of the currency hurts the economy more on the long run. Link to Wikipedia article on money supply. This is one of the thing which Bitcoin wants to solve/or people who are bitcoin evangelists tell. Like getting a pay hike of 5% and increase in commodity prices by 5% makes no difference in the end for anyone, increase in amount of currency in flow and prices for commodity will make no difference.

Also, take this into account that the minimum possible transaction in Bitcoin is a Satoshi which is 0.00000001 BTC. So even if there is a day when 1BTC is \$1 million, 1 Satoshi would be 1 cent.