Hyperdeflation
Candlefocus EditorWhen a currency is introduced, a large amount of demand is created for that currency, as it is seen as a way to purchase goods and services with an inflation-proof way of exchanging money. This surge in demand creates an almost instantaneous increase in price levels. In the case of Bitcoin, this was seen as the currency quickly rose to an all-time high in late 2017.
The larger problem with hyperdeflation is that it doesn't last. As the currency becomes more common, it may become easier to obtain—and as supply increases, prices will drop. During these times of decreasing price levels, it's easy to become overzealous and purchase way more than necessary. Doing that, however, can lead to unexpected losses—particularly when the currency begins to decline in value when prices continue to drop.
Hyperdeflation can also lead to deflationary spirals, in which negative demand shocks cause the deflation to become self-reinforcing. As prices decline, people become hesitant to spend their money, as the value of their money increases. This leads to further decreases in prices, and eventually, the deflation can spiral out of control and become extremely damaging to an economy.
Hyperdeflation is an incredibly rare phenomenon, seen mainly with new currency introductions, and is something that must be paid close attention to. It can lead to serious disruption of an economic cycle and can spiral out of control without proper economic management - something that can be extremely difficult to do.