Why Global Deflation May Not Be Bad News for Bitcoin

Contrary to expectations, bitcoin could see a positive performance during a possible bout of global deflation if it acts not just as an investment asset, but as a medium of exchange and a perceived safe haven like gold.

The top cryptocurrency by market value is widely considered to be a hedge against inflation because its supply is capped at 21 million and its monetary policy is pre-programmed to cut the pace of supply expansion by 50 percent every four years.

As such, one may consider any deflationary collapse as a price-bearish development for bitcoin. Talk of deflation began earlier this month after the U.S. reported massive job losses due to the coronavirus outbreak. The prospects of a deflationary collapse have strengthened with this week’s oil price crash.

“The oil price rout will send a deflationary wave through the global economy,” tweeted popular macro analyst Holger Zschaepitz on Tuesday.

Cash typically becomes king during deflation because the drop in the general price levels boosts the monetary unit’s purchasing power, or the ability to purchase goods and services.

“Unlike inflation, when people try to get out of the dollar because it’s losing value, during deflation people are more comfortable with the dollar because its value is going up,” said Erick Pinos, ecosystem lead for the Americas at the public blockchain and distributed collaboration platform Ontology.

The rush for cash, however, may not have a substantially negative impact on bitcoin’s price because deflation would also boost the purchasing power of the cryptocurrency.

“While the price per coin may stagnate during a period of aggressive economic deflation, the inherent buying power of the currency will actually rise, possibly quite significantly,” said Brandon Mintz, CEO of the bitcoin ATM provider Bitcoin Depot.

As time goes on and people become more comfortable with digital assets, the average person begins to see Bitcoin as a legitimate viable alternative to gold.

The uptick in the purchasing power will likely draw greater demand for bitcoin, as the cryptocurrency is already used as means of payment.

“Hundreds of thousands of businesses, brands and merchants do accept the ‘digital gold’ as payment, and thousands more every day are realizing the benefits of diversifying their revenue stream and accepting bitcoin as payment for their goods and services,” said Derek Muhney, director of sales and marketing at Coinsource, the world’s leader in Bitcoin ATMs.

Moreover, the cryptocurrency’s appeal as a medium of exchange is likely to continue strengthening with the growing prevalence of technology in consumers’ everyday lives caused by the coronavirus pandemic.

Digital gold

Ever since its inception, bitcoin has been dubbed “digital gold.” Like the yellow metal, the cryptocurrency is durable, fungible, divisible, recognizable and scarce.

Both assets share features that fulfill Aristotle’s call for a currency to be practical and functional. Bitcoin has actual utility as the means of payment, which gold lacks, according to Coinsource’s Muhney.

“As time goes on and people become more comfortable with digital assets, the average person begins to see Bitcoin as a legitimate viable alternative to gold. Thus, it’s reasonable to assume that during a period of deflation bitcoin would perform well like gold has in the past,” said Eric Pinos, America’s ecosystem lead at the public blockchain and distributed collaboration platform Ontology.

Hence, gold’s performance during…

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