Ask HN: Why is Bitcoin deflationary by design

[xwvvvvwx]

The bitcoin protocol specifies 21 million coins as a maximum.

The original paper says only:

Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free

Why is it desirable to be inflation free? What are the downsides to this approach?

[BjoernKW]

This is predicated on the notion that Bitcoin transactions in contrast to fiat money transactions aren't equal to taking out or paying back a loan: https://en.bitcoin.it/wiki/Deflationary_spiral

Paper money essentially is an IOU with a specific value at a specific time. If the value of the underlying currency changes after that point in time that changes the incentive to pay back that IOU because the amount owed is still the same but the underlying value of that amount is different.

The assumption with Bitcoin is that rather than a debt Bitcoin is an asset. If that asset becomes more valuable relative to the market you'd simply pay less Bitcoin for the same goods, simply because you don't have to worry about its value relative to a loan you've either taken out in the past or you're going to take out in the future.

That's the idea at least. Time will tell if it really works out that way but the theory seems to be sound.

[2_listerine_pls]

Why is it desirable to have inflation?

[sunseb → 2_listerine_pls]

Because users don't spend their money to buy and sell goods, they just buy and hold in hope of getting rich later.

Hyperinflation is bad of course, but moderate/controlled inflation is a need to make a currency works IMHO.

[eecks → 2_listerine_pls]

It makes paying back debt easier, doesn't it?

[ericb]

It gives bitcoin its first use-case--inflation resistance. All other currency is continually losing value, by design. It is logical to pick the currency that doesn't lose value by design to store your money. Everyone talks about how bitcoin's volatility makes it a bad store of value. This is only true in the short term, though. In the long term, an asset that trends upward is a more ideal store of value even if it is volatile.

[meric]

What do you mean by desirable?