How Supply Affects Crypto’s Value, Explained
One of the main downsides is a concept known as a “deflation death spiral.”
Like with hyperinflation, this is where things go to extremes the other way. Demand decreases because fewer people are spending money — yet, at the same time, prices are tumbling. Because the number of consumers buying goods or services has reduced, wages are vulnerable to falling, and economic productivity tumbles with it. This can lead to companies going out of business altogether.
It’s almost like a staring contest, where companies and consumers are waiting to see who blinks first. Businesses keep cutting their prices in an attempt to woo customers, but the public is holding out because they expect prices to fall. Ultimately, there’s a risk it could all become a race to the bottom.
This goes back to the Austrian School of Economics’ perspective that people would still need to spend money for essentials. It also believes that, as long as a currency or economy isn’t built on foundations of debt, the levels of deflation would stabilize to prevent such a death spiral.
In a way, this leaves cryptocurrencies at an impasse. How can it be transacted in order to gain momentum and attract mainstream adoption without missing out on the fact that their assets could be worth more in the future? Some advocates, like this Medium blogger, argue that the best way to remedy this is to make purchases using crypto — and then instantly buy more of it using fiat. If small things like coffee and lunch are bought using crypto, it can help demonstrate its utility and boost demand, with more merchants accepting it as a method of payment.