What is Deflation? | CryptoWallet.com

What is Deflation?

In economics, deflation is defined as a decrease in the level of prices of goods and commodities in an economy, usually due to a reduction in the supply of money.

The financial system of modern times is said to be inflationary. This is because the supply of money is indefinite as more of it can be created and issued to the economy by the central bank according to its monetary policies. The value of money, however, is expected to reduce each time it is created.

Conversely, the cryptocurrency economy operates a mix of both inflation and deflation. Taking Bitcoin as a case study, the digital currency is expected to be inflationary until the last bitcoin is mined as it has its maximum supply capped at 21 million. This means that there will be no supply of Bitcoin available to the market anymore, at which point the asset becomes deflationary.

The value of Bitcoin will be expected to keep increasing while spending fewer units of the currency in itself.

Is price deflation bad?

This depends on what angle it is being looked at from. For one, deflation could result from economic growth as asset prices and commodity prices tend to reduce. The decline in price as a result of economic growth could also be associated with improvement in the technology and innovation sector. For example, if the process of making a fabric becomes easier due to improvement in technology in the textile industry, one would expect to find more businesses involved in the fabric-making process, consequently increasing supply and an associated decrease in prices.

Ultimately, an increase in the supply of any commodity or service will lead to a decrease in the value of such commodity, which may be good or bad from an economic standpoint.