Mention “deflation” and the first thing people think of is the Great Depression of the 1930s. But the worst-ever deflation going on right now is in the Bitcoin world. It’s not that Bitcoins are losing value; this year, Bitcoin is up 64-fold. As a result, prices of real things in terms of Bitcoins are plummeting.
For this article, I created a Bitcoin Consumer Price Index1 that’s the exact equivalent of the U.S. Bureau of Labor Statistics’ Consumer Price Index. The only difference is that it measures prices of goods and services (from food to clothing to gasoline to haircuts) in terms of Bitcoins instead of dollars.
This is a great development if you own a lot of Bitcoins. But it would be a disaster if it were the official currency of the United States—the coin of the realm, so to speak.
Deflation is all about the buying power of a currency. It’s not just prices of things people buy that fall in a generalized deflation. Wages and salaries also fall. So cheaper goods aren’t really any cheaper in terms of your buying power.
Two bad things happen in a deflation. First, people tend to postpone purchases as they wait for prices to get lower. That slows the economy to a crawl. Second, debts get more and more burdensome because they don’t shrink the way everything else does. If you owed 1,000 Bitcoins before the deflation, you still owe 1,000 Bitcoins after it, only now your paycheck has shrunk by 98.5 percent. The only solution is to default. That’s what happened on a massive scale in the Great Depression.
The Bitcoin CPI is just another way of demonstrating that Bitcoin isn’t remotely suited to becoming a real currency, as numerous economists have pointed out. Better to use it to buy a round—or a hundred rounds—at the local bar.