People love to talk about historical and contemporary hyperinflation episodes when shilling bitcoin. Bitcoin’s deterministic supply path and mathematical elegance shine bright in the context of a money supply growing out of control and price levels that accelerate daily. When debating bitcoin’s merits with a normie, the words “Weimar” and “Venezuela” almost always come up.

Venezuela is currently experiencing hyperinflation

But people, even bitcoin advocates, are not as good at understanding deflation and how such an environment would be for bitcoin’s value. In fact, since bitcoin’s introduction at the peak of the financial crisis in 2008, much of the developed world has been in a deflationary episode. For the first time in history, central banks are setting rates below zero in an effort to push up wages and growth and normal nominal interest levels.

The Eurozone, one of the largest economies in the world, is in deflation

Deflation means prices are falling and that is a good thing for the economy, right? Wrong — let’s dig deeper into what deflation is and how it impacts bitcoin and broader crypto asset prices.

Deflation is not just falling prices for goods. Deflation is a fall in the macroeconomies broader price level. This means wages are stagnate, daily goods prices are stagnate, and cash in the bank does not earn anything for you. When a worker is not getting any raise at work and he notices the prices of goods are falling, he is incentivised to prolong purchases, which is a drag on overall economic demand. This leads to lower corporate profits, lower tax revenues, and slow to no growth in the economy. The central bank then pushes rates lower and lower in an attempt to stimulate lending and economic activity, until they can’t go any lower at zero and are forced to go into the negative for nominal rates.

Now look at it from an investor/trader’s point of view. Your cash is earning nothing at the bank so if you want to get any kind of growth in your wealth you need to plow it into an asset market. Stocks and real estate have been in a never-ending bullmarket for a decade and commodities are sluggish because of a weak economy, so where is a guy to go for getting some yield? Enter: bitcoin.

US equities have triplied in price in the past decade, overbought in many metrics

The US real estate market has more than doubled in the past decade

Bitcoin has also had a roaring bull market in the past decade, with disgruntled victims of a broken system in the Great Financial Crisis looking for a new paradigm. More than just Gold 2.0, bitcoin has brought to the table true internet money — digital cash in bearer asset form that is uncensorable and robust to even state-level attacks. Unlike traditional asset markets like stocks that have fundamentals like earnings, or real estate with rents and raw material cost, bitcoin is sentiment driven and its price can rapidly rise (and drop), making it a wonderful uncorrelated asset class that is essential for any investor’s portfolio.

While hyperinflation leads to degradation in fiat’s value and thus an appreciation of the value of bitcoin prices in fiat terms, deflation also pushes investors searching for yield in fiat to buy bitcoin in order to chase returns that they otherwise aren’t getting in the bank, bond markets, or over-bought traditional asset markets.

So remember deflation is good for bitcoin!