Bitcoin is said to be deflationary money but what does this actually mean ?
One of the most important consequences of decreasing monetary issuance and fixed monetary issuance is its tendency to make the currency inherently deflationary. Deflation refers to the phenomenon of an appreciation in value caused by a mismatch between supply and demand. This causes an increase in the currency’s value (and exchange rate). Price deflation is the opposite of inflation. It means that money has more purchasing power over time.
Many economists believe that a deflationary economic system is a disaster and should be avoided. This is because people will tend to save money rather than spend it in times of deflation. This phenomenon was witnessed during Japan’s “Lost Decade”, a period in which the demand for currency fell to a point that pushed it into a spiral of deflation.
Experts in Bitcoin argue that deflation itself is not a problem. Deflation is not associated with a decline in demand, as that is the only instance of deflation we know. It is difficult to enter a deflationary cycle in a fiat currency that can be unlimitedly printed.
The good thing about deflation is that it is opposite to inflation. Inflation leads to a gradual and inevitable debasement in currency. This results in hidden taxation, which punishes savers in an effort to bail out the largest debtors. governments). Government control of currencies is prone to the moral hazard that easy debt issuance can be later erased by debasement at cost of savers.
It is still to be determined if the deflationary nature of the currency is a problem if it is not driven by rapid retraction or an advantage, as the protection against inflation and debasement far exceeds the risks associated with deflation.