The Bitcoin Economy As It Pertains To Reverse Inflation

If you’ve been paying attention to the price of Bitcoin lately, you might be wondering to yourself, “How is the price per coin this high? What is this founded on? Is there really a high demand for digital currency?” Learn the basics of reverse inflation, supply and demand, and how Bitcoin’s price may not be as imaginary as it seems.

Inflation Versus Reverse Inflation

When an asset inflates, it becomes worth less over time. You may be aware of inflation as it pertains to paper (fiat) currencies. The cost of groceries and household was been a lot cheaper back then, yet people did not earn as much. To determine inflation you take the average cost of an everyday item – such as bread – and compare it to the average income of a worker of a given year. Then you compare those values to the values seen today. If you notice that, “For every hour someone works today, they can afford fewer items compared to X number of years ago,” then you’re observing inflation.

This inflation comes about for many reasons. In the contexts of the United States Dollar, you’ll hear of the US Dept. of Treasury printing more currency to meet the demands of the government. This waters down the value of pre-existing dollars, and therefore inflation occurs.

Reverse inflation is when the buying power of a currency does not go down but up. This is not due to an increase in supply (as is seen with fiat currency) but a decrease. Bitcoin experiences a reverse inflation for several key reasons.

1. Lost Or Destroyed Bitcoin

The unfortunate reality is that not all early miners still have access to the coins they mined for fun in the year 2008-10 and beyond. Bitcoin wasn’t always seen as an emerging form of spending power and investment. Therefore, there are rumored to be one or more million (out of a total maximum of 21 million) Bitcoin to be gone forever. Consider the tale of an early adopter accidentally throwing away an external hard drive that held a Bitcoin wallet containing 750 coins.

This story – and stories like it – of tragedy actually increase the value of remaining Bitcoin due to supply and demand. If it is true that 10-15% of coins are gone forever (lost/destroyed) then that implies fewer Bitcoins to purchase. As supply and demand tells us, the fewer number of an item demanded, the greater their perceived value.

2. Increased Investor Interest

As big ticket investors enter the cryptocurrency scene, the number of coins available decreases rapidly as they’re swept up by eager long-term holders. This creates a perception of lessened availability, which in turn causes the market to increase. Conversely, as these same investors dump their coins, the availability increases and the price decreases.

The recent price graphs reveal more buying than selling, which creates a steady upward trend of price over time. Bitcoin is considered by many to still be a new form of currency. They just may be right; given the many hundreds/thousands of years that fiat currency has been in existence, the mere number of years Bitcoin and other cryptocurrencies have been around is small in comparison. Therefore, investors are just now starting to enter the scene with very deep pockets ready to invest.

3. Uses And Applications

Bitcoin is still a very new technology, and it’s still finding its purposes in every day life. The lightning network, a very new form of instantaneous Bitcoin transfer, is one example of these emerging technologies that pave the way for a brighter future. Bitcoin remains to be impractical to the average citizen and general population. Therefore, as Bitcoin finds its home in the common spending practices of the population, the more people will appreciate its functionality and benefits over fiat currency.

You Don’t Have To Buy A Whole Bitcoin

Finally, Bitcoin is fungible. This means that it can be broken down into very small portions. Investors are encouraged to buy fractions of a Bitcoin to get their alternative form of investment started. Bitcoin’s Creator Satoshi Nakamoto prepared for a future of high demand by allowing an owner to possess as small as one hundred millionth of a coin. Therefore, no matter how expensive the price of one Bitcoin gets, there will always be a much smaller portion of Bitcoin affordable by literally everyone on the planet. Bitcoin is posturing to be the world’s first universal currency, and — while it’s still just in its infancy — its future is very bright