Hyperinflation is something you’ve probably heard of before. To put it simply, hyperinflation occurs when there is a continuing increase in the amount of money (currency) that is not supported by a corresponding growth in the output of goods and services. There are numerous examples from history, the most famous being that of the Weimer Republic following World War I. At the height of the inflation, one US dollar was worth 4 trillion German marks.
This article points to an interesting and opposite phenomenon in Bitcoin value over time. Since 2011, the supply of Bitcoin has seen steady growth. At the same time, demand for the currency has skyrocketed. This has caused the relative dollar value to skyrocket. If you haven’t read about the guy who bought $27 on Bitcoin in 2009, you’ll want to read that here.
As time goes on, Bitcoin miners have to solve increasingly more difficult algorithms as the amount of unmined currency diminishes. This translates to more time, energy, and expensive hardware (see Paul Krugman’s Op-Ed about why Iceland offers optimal mining). Since the total supply is finite (never to exceed 21 million Bitcoins), the growth rate of Bitcoin’s supply will eventually asymptote toward zero.
Is deflation a bad? Well, it depends on who you ask. As a student of Keynesian economics, I’ve always regarded deflation as negative because it incentivizes individuals to save money rather than invest and create jobs. When a currency’s value is surging, individuals are more likely to horde it. On the other hand, a steady currency facilitates fluid transactions. That said, if you were to ask a proponent of the Austrian School, you would get an entirely different answer.
*not to be confused with the codename for AngularJS 1.2.11 which is so awesome that I’ll be discussing it in a separate post.