Deflation

In economics, the term deflation refers to the general fall in the prices of goods and services, which means that the purchasing power of a currency increases over time. In other words, you can buy more things with the same amount of money. This phenomenon is often associated with a reduction in the money supply or a significant increase in the production of goods and services without a corresponding increase in the money supply. In the cryptocurrency world, the concept of deflation is fundamental, especially for assets like Bitcoin. Unlike fiat currencies (such as the dollar or euro), whose supply can be adjusted by central banks (which can lead to inflation), many cryptocurrencies are created with built-in mechanisms that limit or even reduce their total supply over time.

A cryptocurrency is considered deflationary if:

  1. Has a limited total supply (hard cap): the maximum number of coins that can ever exist is predefined in its code.
  2. It has burning mechanisms: Some of the coins are permanently removed from circulation, for example by sending them to a “dead” address to which nobody has access. This can be done as part of transaction fees or through regular burning programs.
  3. It has a decreasing rate of issuance: the rate at which new coins are created and introduced into circulation decreases over time.

Examples of deflationary cryptocurrencies

  • Bitcoin (BTC): The best-known example of a deflationary system. By cyclically reducing block rewards and limited supply, Bitcoin continues to attract investor attention.
  • Binance Coin (BNB): BNB implements a deflationary strategy by burning tokens. This mechanism gradually reduces total supply, thus increasing the value of the remaining tokens.
  • Ethereum (ETH): After the “EIP-1559” update, Ethereum introduced a burned base fee for each transaction, creating deflationary features for the ETH token.

Bitcoin (BTC) is the most famous example of a cryptocurrency with deflationary features:

The total coin supply is limited to 21 million: the Bitcoin protocol specifies that there will be a maximum of 21 million Bitcoins. Once this limit is reached (estimated around 2140), no new Bitcoins will be created.

Halving: Approximately every four years (or after every 210,000 blocks mined), the reward miners receive for validating a block and adding it to the blockchain is halved.

  • At first, the reward was 50 BTC per block.
  • The first halving (2012) reduced it to 25 BTC.
  • The second (2016) to 12.5 BTC.
  • The third (2020) to 6.25 BTC.
  • The fourth (2024) to 3.125 BTC.

This mechanism drastically slows down the rate at which new Bitcoin enters circulation. As the supply of newly created Bitcoins decreases, and demand maintains or increases, basic economic principles (the law of supply and demand) suggest that the value of each Bitcoin should increase over time.

Deflation: Advantages and disadvantages

Advantages of deflation

  • Increase in value

With a constant or decreasing supply, cryptocurrencies like Bitcoin have greater potential to increase in value over the long term.

  • Protection against fiat inflation

When traditional currencies like the dollar or euro lose value due to inflation, a deflationary currency can become an attractive store of value.

  • Motivating investment preservation

Users are encouraged to hold tokens longer, expecting their value to increase.

Disadvantages of deflation

  • Liquidity problems

If users prefer to hold coins rather than spend them, this can reduce economic activity.

  • Reliance on speculation

A large proportion of users may view deflationary cryptocurrencies more as speculative investments than a medium of exchange.

  • Limited accessibility

As the price rises, cryptocurrencies like Bitcoin become increasingly inaccessible to ordinary users.

Conclusion: while deflation may have certain implications in traditional economies (such as discouraging spending), in the context of cryptocurrencies, it is often seen as a positive design feature that gives the asset the potential to increase in value and makes it a more reliable store of value.

Interested in a particular cryptocurrency? Check out its price and its price history on our dedicated cryptocurrency price page.