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Can Bitcoin thrive during periods of deflation?

by , 29 April 2020
Can Bitcoin thrive during periods of deflation?
Traditional currencies, like the US Dollar, Euro, Yen or Pound are all inflationary in nature, due to the very fact that central banks can print them at will. This means fiat money loses value every day as its purchasing power is reduced.

Bitcoin on the other hand, is widely considered to be a hedge against inflation.

That's because Bitcoin's supply is capped at 21 million and it's pre-programmed to cut the pace of supply expansion by 50% every four years…So, nobody can “print” or issue new bitcoin.

But right now most of the world is heading into a deflationary environment so what does that mean for Bitcoin and other crypto currencies?

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A deflation spiral is starting to plague the world and Bitcoin may be the best hedge against it
 
Talk of deflation began earlier this month after the US reported massive job losses due to the coronavirus outbreak.
 
You see, if people have no jobs, they have no income to spend. Therefore, prices will remain low and even fall to remain competitive.
 
And, the prospects of a deflationary collapse have strengthened thanks to the oil price crash. 
 
Popular macro analyst Holger Zschaepitz recently tweeted, “The oil price rout will send a deflationary wave through the global economy”.
 
So what assets thrive during periods of deflation?
 
Usually, cash becomes king, because the drop in the general price levels boosts its purchasing power.
 
“Unlike inflation, when people try to get out of the dollar because it's losing value, during deflation people are more comfortable with the dollar because its value is going up,” said Erick Pinos, President and CEO at blockchain and distributed collaboration platform Ontology.
 
The rush for cash, however, may not have a substantially negative impact on Bitcoin’s price because deflation would also boost the purchasing power of the cryptocurrency. 
 
“While the price per coin may stagnate during a period of aggressive economic deflation, the inherent buying power of the currency will actually rise, possibly quite significantly,” said Brandon Mintz, CEO of the Bitcoin ATM provider Bitcoin Depot.
 
The uptick in the purchasing power will likely draw greater demand for Bitcoin, as the cryptocurrency is already used as means of payment. 
 
Hundreds of thousands of businesses, brands and merchants already accept Bitcoin as payment. And thousands more every day are starting to realise the benefits of diversifying their revenue stream and accepting Bitcoin as payment for their goods and services.
 
Moreover, the cryptocurrency’s appeal as a medium of exchange will continue to strengthen with the growing prevalence of technology in consumers' everyday lives caused by the coronavirus pandemic.
 
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The best example to look at when it comes to deflation? Gold!
 
Ever since its inception, Bitcoin has been dubbed “digital gold.” Like the yellow metal, the cryptocurrency is durable, fungible, divisible, recognisable and scarce. 
 
Both assets share features that fulfil Aristotle’s call for a currency to be practical and functional. Bitcoin has actual utility as the means of payment, which gold lacks, according to Coinsource’s Muhney. 
 
And as times goes on and people become comfortable with digital currencies, people will begin to see Bitcoin (and other alt coins) as legitimate viable alternative to gold.
 
That means, gold’s performance during the previous bouts of deflation could serve as a guide for Bitcoin investors.
 
And historical data shows gold performs well during deflation, which includes a sharp rise in financial stress and increased risk of corporate defaults; highly leveraged companies tend to go bust during deflation because their revenues fall, while their debt service payments remain the same. 
 
During periods of deflation, the real or inflation-adjusted price of gold rose an average 33% per annum in the 1970s, 18% in 1980s and 15.8% in 2000. 
 
So, if gold’s historical data and the recent gains in cryptocurrencies is a guide, then Bitcoin (and cryptos) appear to be a great investment when deflation spirals out of control.
 
This is just another reason to own some!
Joshua Benton,
Managing Editor, The South African Investor
 
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Can Bitcoin thrive during periods of deflation?
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