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Inflation VS. Deflation: Affection on Crypto

Vladlena Martus 2022-11-03

Inflation VS. Deflation: Affection on Crypto

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Did you know that an overall rise in inflation tends to raise the price of Bitcoin, and when the inflation rate becomes negative, deflation tends to push the price of Bitcoin down? 
 
With the COVID-19 pandemic, economic crisis, and many other severe global events, central banks worldwide are trying to boost the economy by printing more money. The global economy is in a cycle in which central bankers don't withdraw money from the economy but only add more. Thus, the money printing cycle impacts Bitcoin's price. 

Inflation and Deflation terms

In economic terms, inflation is a general increase in the price level of an economy over time. Deflation, by contrast, is the general fall in prices. 
 
Remember the coffee prices in the past? You could buy a cup of coffee for less than a dollar over 40 years ago, and now coffee cups can cost up to $10 or even more. Your $10 is different from the $10 of twenty or thirty years ago; what you can purchase with that $10 has changed significantly. You can’t buy as many goods and services with that $10 today as you could in the past. The price has gone up, and this was driven precisely by inflation. 
 
In general, slight price inflation in the economy is positive because it shows an inherent demand for specific goods or services. 

What does the Fiat money Inflation mean?

The best and most general reference to inflation is the relation to fiat money. Thus, the rise or fall of prices is the best and most straightforward example of how inflation works. When prices inflate, each dollar's purchasing power decreases, but people's purchasing power depreciates consistently.  

What causes Inflation and Deflation?

The main reason why inflation and deflation occur is the money expansion in the economy. 
 
Let's look at this example with cars to understand this concept better. Cars demand is always steady, year on year, and new cars can cost approximately $30,000. The authorities' actions lead to the increase of money amount, let's say, by 15%. What happens to the car price? It's going to grow as well. The more money holders intend to buy the same amount of new cars. It means that the more money the economy has, the more money will be necessary to buy the same goods. 
 
Let's imagine the opposite when the amount of money decreases. The less money available, the fewer people could afford to buy a new car. In this case, the manufacturer will have to drop the price or stay with the unsold cars…
 
In this example, the demand is steady, but the purchasing power of people changes depending on how much money is available in the economy. 
 
So, inflation and deflation can be determined as follows: 

  • Inflation = Expansion of the money
  • Deflation = Contraction of money

 

Is there any healthy Deflation in the economy?

Economic deflation is not something one really desires to watch; however, related to consumer prices, deflation can play a significant role and make the economy more productive. 

Thus, for example, technologies are steadily deflationary. One computer now costs less than 20 years ago, but its processing power has dramatically increased! Now you get a better and more efficient computer at a cheaper cost. This is deflationary, allowing us to be more productive and create new inventions. 

Bitcoin Supply Inflation

Anything in the world can be inflated, from money to cars and coffee. Bitcoin is also an asset or good that is influenced by inflation. Thus, being created as an asset to store funds and be a currency to pay for something, its inflation rate was preprogrammed into its code.
 
Bitcoin is the fuel to maintain and secure the blockchain itself. Every 10 minutes, but to be more specific approximately nine minutes, the new transactions are confirmed to the next block of the chain. The miners confirming those transactions get a reward. Every 10 minutes, a new BITcoin is added to the economy and accessible for spending. 
 
To limit the cap and the number of coins, the BTC creator Satoshi Nakamoto has programmed a halving cycle into the code. The reward is halving every three years and nine months, and new coins are slower to appear. 
 
We talked very detailedly about Bitcoin halving and mining, its cap, and limitations for mining in our blog. You can check out this blog here.
 
The main reason people invest in Bitcoin is the limited amount of tokens, and BTC's inflation can be figured out quickly enough. Also, Bitcoin will be more expensive if the total supply is mined. The demand will grow, but the amount will stay the same – it's pretty easy to understand that it will lead to a price increase. 

Bitcoin Price if there is Money Inflation or Deflation

The money supply of the world's most developed economies is increasing daily, and when they print more money, Bitcoin still has a fixed number of coins and its price in fiat currency increases. 
 
The Fed, as many of us know, is the central bank of the US, and its asset sizes help others estimate the amount of printed money. Thus, before 2007, the Fed's assets were estimated to be nearly $1 trillion. In 2021, this amount had "mooned" to a record $8 trillion. The more money being printed, the higher the BTC price. 
 
The Bitcoin price also seems to collapse when deflation happens because of money collapsing, credit problems, and more. For example, at the beginning of the COVID-19 pandemic, when people were sitting at home and spending less money, businesses had to pay for inventory and other things. The revenues collapsed, and many people were fired; the pandemic, in general, was pushing the prices down, and, in the end, the BTC collapse was noted too. 
 
The important tip to follow as a rule: BTC keeps up with the money creation. 

  • If the supply of money is increasing substantially, then the price of Bitcoin likely will rise;
  • If the money supply decreases, the price of Bitcoin will probably fall. 

However, also note that these trends may not correspond directly.

Is BTC an Asset Effective for Diversification of Risks Against Inflation?

We have understood that inflation occurs when the amount of money in the economy increases too much, which also causes a price rise. 
 
People want to have investments that can fight against inflation, store purchasing power, and act as a diversification tool when inflation is on. Investing in another type of economy or companies that perform better against inflation is the answer. 
 
At the same time, there is one thing to be noted: if the investment against inflation doesn't grow together with the inflation rate, the wealth collapse may also happen.  
 
Luckily, there is an asset that can help you store your funds during inflation. Yes, it's the cryptocurrency, including, of course, BTC. With its fixed amount of supply that can never be increased, it really can preserve the purchasing power of fiat money. However, remember that deflation will tend to underperform BTC. 
 
Here you also need to be careful and count on long-term investments when dealing with Bitcoin. Here we talked about Bitcoin becoming, and it could be great to remember all of the ups and downs that BTC has survived. 

To sum up…with a brief comparison of Fiat money and BTC

To sum up, we can remind you again that there is healthy inflation when the economy is experiencing a small number of prices rising, and the purchasing power of customers is also on average. 

Since 2020, when the pandemic began, the Fed has printed about $4 trillion. Thus, inflation is getting higher and higher, and the Bitcoin price has risen too. Now, the BTC price experiences a bit of an issue that you can read about here

Also, Bitcoin as an investment can become good storage for the long-term because Bitcoin fights against inflation rate with a fixed amount of coins and limited supply. 

Suppose you want to see the difference between fiat money and cryptocurrency. In that case, you can look at the table below and understand why BTC, or even another cryptocurrency, can be a smart choice as a weapon against inflation:

BITCOIN VS. FIAT MONEY

BITCOIN FIAT MONEY
Created by computers Issued by the government
Deflation (fixed amount of Bitcoins) Inflation (unlimited printing)
Decentralized, not owned by any entity Centralized, controlled by government & Banks
Low fees for international transfers and transfer time is within an hour High fees for international transfers and transfer time is a few days
Always in control of your funds The government can freeze your account

Source: Pay DEPOT

Of course, it's always your choice to make! Wisebitcoin offers you different options and shares curious information from the crypto world!

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