Will cryptocurrencies that have a finite supply (like 21m btc) cause deflation? I figured out that cryptocurrencies can cause a deflationary spiral, since the cap is the same (eg. 21m BTC) but the economy is growing. That would only happen if all coins are mined. 

But deflation would usually lead to a recession. Is there a way to prevent that?

I've done some research, like on the Bitcoin Wiki page deflationary spiral, but I don't seem to understand why deflation won't happen.


  The ‘deflationary spiral’ is a real condition that affects the popular fractional reserve backing system. Bitcoin is not affected by this because it is fundamentally different from popular currency.
Yes, cryptocurrencies that have finite supply are bound to create deflation. This is because the same finite supply of coins will represent an increased economic output that results from technological innovations. Thus the value of a coin is worth more tomorrow than today thereby increasing its purchasing power. However, if this deflation is bad is highly debated in the economic circles and there seems to be no concrete consensus on it.

The critic about deflation being linked to deflationary spiral stems from the great depression of 1929. The deflation in the economy post the great depression increased the real value of debt thereby compounding the problems of economic recovery. Moreover, because of deflation people hoarded money rather than spending it exacerbating the effects of recession. If you look at deflation from this lens then it could be deemed as hurtful as it prevents actions that could potentially stimulate the economy.

However, this can also be viewed from a different angle. We have seen the effects of deflation only in times when our economy was in trouble and there was a complete collapse of demand. Deflationary characteristics of Bitcoin is not based on collapse of demand, but a very predictable supply.

You will also see that a lot depends on the type of money used in the economy. Fiat money is based on debt: government issues bonds and the central banks buy these bonds by printing money. However, Bitcoin has properties that makes it resilient to credit expansionary forces thereby delinking it from public debt. Thus comparing the deflationary aspects of fiat money to the deflationary aspects of Bitcoin is like comparing apples to oranges.

Some people point out that deflationary nature of Bitcoin will lead to hoarding practices and hence lead to fall off in demand. I think it's a fallacy, since purchases related to houses, food, cars etc. will continue to happen. They help you make investments that could produce a higher return than the appreciation in the value of Bitcoin over the same period. For example, using a car helps you get to your office faster and be more productive, there by increasing your year-end bonus. I believe, only investments in assets that people currently invest to protect them from inflation (second home, gold, arts etc.) will reduce. Demand related to consumable/depreciable goods will continue to remain steady.

I'll sign off with a food for thought. The price of electronics gets cheaper every year, still you do not postpone the purchase of your electronic gadget in anticipation of price reduction as it helps you achieve other important goals whose return is higher than the price decrease over the same period. This can be extrapolated to the spending characteristics in hyperbitcoinized world.