Inflation, a term that has existed since the dawn of money. People have always feared it and, to understand how to mitigate it, we need to understand what it actually is. Its definition in simple words is that it is an increase in the amount of money you pay for goods or it is a decrease in the purchasing power of your money. These are termed as price inflation and monetary inflation respectively.
Price inflation and Monetary inflation
Price inflation is when the prices for goods get higher and you have to pay a larger amount of money than usual to purchase any good. This is more commonly known and is generally referred to as the only definition of inflation.
Monetary inflation, on the other hand, is an increase in the supply of money which ultimately results in price inflation. It basically decreases the value of the existing money so you have to pay more again for the same good. Money printing by governments can be easily taken as an example to understand this. As more money is printed, its purchasing power decreases because more money is now in circulation but the amount of goods has not increased in proportion to it.
The recent condition of Zimbabwe is a prime example of how hyperinflation can destroy the economy of a country. The government tried to double the prices of fuel and almost all other goods to control hyperinflation but failed. Ultimately, they had to introduce a new currency but that still did not solve the issue so the masses started to adopt Bitcoin as no government laws control it. Bitcoin was seen as a hope to solve the crisis. Here, the question arises ‘Can Bitcoin alleviate inflation?’.
How Bitcoin can cure Inflation
Bitcoin is a digital cryptocurrency whose supply is not controlled by any person, group or government but is rather lies under the amount of computing power thrown at the blocks. This means that it uses intense energy and time to generate one. Secondly, the algorithm controlling its generation is internally limited to control the maximum number of bitcoins that can ever be made. The number rests at 21 million bitcoins and it gets progressively harder to mine the bitcoins that are left. This quality of bitcoin takes away the minting or printing power of the currency from the governments and places it right in the hands of the people who are ready to spend their time, energy and computing power (which translates to money) in mining them. This feature alone can potentially eliminate price inflation.
Now, if bitcoin is adopted as the primary currency all around the globe, it can bring a massive change. As more people use it, its long term demand will continue to rise. That demand will be the driving force for skyrocketing the value of each bitcoin. Concurrently, the cost of goods purchased with bitcoin would decrease. Due to its limited supply, the currency will become scarce and that will serve as a deflationary force.
People who generate wealth will be rewarded with more of the currency. People will thus be encouraged to work harder. Governments will no longer be able to use inflation to manage economies. Instead, they will have to derive their taxation by stimulating consumption.
Bitcoin has the potential to alleviate inflation beyond a shadow of a doubt. The point on which one should ponder is, ‘Will any government let bitcoin to end inflation?’.