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FOCUS 2-The "danger" of Bitcoin deflation.md

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The "danger" of Bitcoin deflation

There are those who are frightened by the reduction in monetary inflation, which will become real deflation from around 2140, because historically the periods of inflation close to zero correspond to stagnation of the economy, but there are points to think about:

  • You will not live until 2140.
  • The reduction in inflation is a problem for the current system, based on fiat currencies and not on scarce assets.
  • bitcoin is divisible.

If for the first two points you could provide important arguments such as: "I will live forever", "I worry about my descendants", "deflation was a problem even during the Gold Standard", etc. on the third point I cannot be denied.

1 bitcoin is divisible and its basic unit is satoshi, from the name of its creator. 1 bitcoin = 100 million satoshis.

If we consider what is generally called M0 (Money Supply type 0), ie the set of money that includes all the physical money as metal coins and currencies, deposits and other liquid assets held by central banks[29], and focus on the US Dollar, the most widespread currency on the planet and adopted as a global monetary standard, we discover that the amount of this type of money in circulation is about 1.5 trillion dollars[30].

They do, in numbers, 1,500,000,000,000,000,000 dollars or 1.5 x 10^18 if you prefer to think in terms of power.

On the other hand, the units in Bitcoin, without considering the possibility of splitting them even further, will be a total of 21,000,000 bitcoins or 2,100,000,000,000,000 (2 million and one hundred thousand billion) satoshis or 2.1 x 10 ^ 15 sats.

In case of need, these units can be divided even more, not going to increase the amount of total value present in the system but further subdividing the units.

An example.

Let's assume that tomorrow the price of the single satoshi is 1 USD. Since the system currently does not allow smaller units of the satoshi to be moved via blockchain, in this scenario, it would risk not being able to carry out transactions below the single dollar. If we wanted to buy a good for 0.50 USD we could not do it. Fortunately Bitcoin is digital and in IT it is possible to create "miracles". On blockchain you will not have more than 21 million x 10^8 units of value without a fork, but on a second layer of transmission these limits do not exist: it is already possible to use smaller units using Lightning Network, without touching the Base Protocol.

We will therefore be able to send for example 0.5 satoshis to buy a good with a value of 0.5 USD.

Thanks to this division after the comma, there will be no risk of having a lack of liquidity nor will it be necessary to increase the limit of 21 million bitcoins in circulation.

There will be units of value for all of us.

If we need new units, because the fundamentals will have become too scarce, we could adopt sub-satoshis. It will therefore be possible to split even more bitcoins without having to touch the basic protocol (BP) but only by acting on the "value unit packages" transferred through the channels on Lightning Network.

The circulation of new units of value will therefore be a fact and will be possible without generating new money from nothing. fiat vs bitcoin

In the picture:

to increase liquidity, new banknotes are entered into the fiat cash system and new denominations are created to compensate for the excess paper available. In the fiat cashless version, new money is printed "out of the thin air" and possibly the base unit is modified to simplify use by the consumer. Liquidity tends to increase due to the direct influence of the central banking system on monetary policies. The supply tends to infinity: the higher the monetary inflation (tending to infinity, from the beginning of the system), the greater the supply. Purchasing power tend to decreases with increasing inflation and therefore with supply. Deflation is to be avoided.

In the example above, the Italian currency Lira, active from the National Unity of 1861 until 2002. From an initial base unit of 1 lira, with fractions called cents, we then passed to higher denominations, like the 100 lire coin, and ended up with the 1000 lire banknote, which fell in value until it reached the parity with the Dollar in 1999. Major cuts were necessary to compensate for the increase in the cost of living: the largest banknote was the 500,000 lire. It is customary to think that an increase in the amount of money present in a system also increases the money available to the individual because salaries would also be recalculated.

In reality it is not the case and these graphs, based on the Dollar, show us this.

Source: wtfhappenedin1971.com

After the end of the Gold Standard (1971), the increase in productivity and global gross domestic product (RDP, Real gross domestic product) did not correspond to a proportional increase in real wages (adjusted for inflation), whereas previously these indices continued in a linear and proportional manner.

In Bitcoin, in order to increase liquidity you cannot print more currency than the cap (21 million bitcoins) and so expand the supply.

The system is totally digital, therefore, in the absence of liquidity, this can be achieved by splitting.

The base unit is modified downwards to simplify the user's use. Purchasing power increases while monetary inflation tends to zero.

Deflation of the monetary system ceases to be a parameter taken into consideration.