Tuesday, February 19, 2013

More deflation in Bitcoinland

A while back I wrote about bitcoins, the decentralized digital currency, that has a rule based supply creation process, supposedly to avoid inflation. As I noted, in Bitcoinland, a fictional country that uses bitcoins, everything is imported, and, as a result, prices of goods and services in bitcoins are heavily dependent, if you live in the US, on the exchange rate between bitcoins and dollars.

The graph below shows the evolution of the BTC/US$  US$/BTC exchange rate.

As you can see, beyond the hike in the exchange rate back in mid-2011, now again there is a significant depreciation approciation of the value of bitcoins. Since the beginning of the year the BTC/US$ exchange rate has gone from around 13 dollars per bitcoins to slightly more than 26. That is, prices in bitcoins have increased decerased by a hundred percent in less than two months, without a significant change in the supply of bitcoins.

Meanwhile, in spite of all the increase in money supply (dollars that is), prices have been stable (no change) in the last two months of 2012 (last data available here). There is more to deflation or inflation than controlling money supply.

PS: Oops. Yes, as it can be seen in my previous post, I have the exchange rate upside down. Blame it on my Latin American roots, since we quote domestic price of foreign currency. The point remains that there is no significant connection between the supply of currency and the price level. Thanks to f for noticing.


  1. The chart shows the price in USD for one BTC. So the bitcoin economy has been in deflation since late 2011.

    1. Actually you're right. Sorry about it f. However, the main point remains, there is no connection between the price level in bitcoins and the supply of bitcoins.


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