On the deflationary nature of Bitcoin

Abstract

Bitcoin was presented at the end of 2008 but the question still remains whether it is a form of money or something entirely different. Bitcoin was not designed with the aim to create money in a strict sense but primarily with the intention to make the transfer of value as effective as possible. Yet, Bitcoin has a capacity to take on the role of money, and that capacity was recognized in court cases. In this regard, the paper presents the results of the primarily empirical but also theoretical research conducted previously on the volatile but still very deflationary nature of Bitcoin and its effect on monetary obligations. The idea that cryptocurrencies can be also used as a hedging instrument to prevent the negative effects of domestic currency depreciation might be controversial for a number of reasons, one of which is certainly the volatile nature of bitcoin "price". We stress that periodic depreciation of its value does not mean that bitcoin is inflationary. On the contrary, bitcoin is deflationary by nature, which is evident in different in-built mechanisms and new ways of application. In this paper, the author uses different analytical method techniques to single out and describe various deflatory mechanisms, both preprogramed and factual ones. The author also applies the synthetical method and its techniques, primarily abstraction and generalization, to sum up the data confirming the main hypothesis that bitcoin is by nature deflationary despite its volatility and, therefore, it can be used as a hedging mechanism.