I was reading Chapter 8 “Bitcoin Economics and Currency Creation” of this book and realized that Bitcoin is like Gold, petroleum or any other natural resources. Its availability is limited. We can create only 21 million bitcoins and it is decreasing after every 4 years. When it first launched in 2009 there were 50 new bitcoins that became available every 10 minutes, and then it dropped to 25 bitcoin after four years; four years later it dropped to 12 ½ which is where it’s at now. So every 10 minutes on average, about 12 and a half bitcoin come into existence. That amount is going to reduce every four years in half until the year 2140 when the very last bitcoin will be awarded.
This is different from any other currency where central bank and print and supply the money to monetary system anytime. The limited supply of bitcoins makes it different than traditionally used currency. This difference makes me think that how it will impact the economy in long-term, considering if we are going to use bitcoin for the medium of exchange.
Here is my thought, on this. If people know that they have limited supply if bitcoins, they will start hoarding it, no one will spend money and this will push the value of bitcoin higher. As the value of bitcoin increases, the price of an item decreases(i.e you can buy the same quantity in 90 rupees, what you were buying in 100 rupees). As no one wants to spend their bitcoin because people know that value is going to increase and they can buy more stuff in future than they can do it now. This will push the economy into deflation loop. The main question is, is it good or bad? My thought is that its neither good or bad? If you keep any intervention(say government or banks) this will stabilize by itself. Lower and lower price of the item encourages people to find a way to decrease the price and it encourages them to innovate. and moreover, once the price of the item is decreased enough, then people will again start spending them and it will eventually find an equilibrium.
The same is true for the inflationary economy, but here government or central bank had control and they can tweak the economy.
What I understand is that neither of the Inflationary or Deflationary economies is good or bad. Its the government intervention which makes things different and bitcoin will provide a way to bypass these interventions.