Inflation dominates headlines, and deflation often doesn’t. But it does get you thinking – what is there to know about inflation vs deflation? Well, explained like you’re 5 – inflation means prices go up, deflation means they go down. But have you ever wondered why some cryptocurrencies multiply while others shrink? Let’s dive deeper into inflationary vs deflationary cryptocurrency.
What is Inflation vs Deflation?
Inflation refers to the phenomenon of an economy’s total level of prices for goods and services rising over time. This means that fewer goods and services will eventually be purchased with the same quantity of money. In simple terms, money’s purchasing power decreases. This can happen for various reasons, such as increased demand or higher production costs.
Deflation is the opposite of inflation. It’s when the overall price level of goods and services in an economy decreases over time. In other words, things become cheaper, and the purchasing power of money increases. Deflation can occur due to factors such as reduced consumer spending or lower demand for goods and services.
Now, let’s get ourselves familiar with inflationary vs deflationary cryptocurrencies.
Inflationary Cryptocurrencies
Digital currencies that are constantly decreasing in value (due to new units being issued) are known as inflationary cryptocurrencies or inflation crypto coins. Unlike traditional currencies, which are often controlled by central banks that can adjust the money supply, inflationary crypto tokens typically have predetermined mechanisms for creating new coins over time. Some examples of inflationary cryptocurrencies include Bitcoin Cash (BCH), Ethereum (ETH), Cardano (ADA), and Avalanche (AVAX).
Deflationary Cryptocurrencies
A deflationary crypto decreases its supply over time, boosting its value. This reduction occurs through buyback-and-burn, where coins are repurchased and removed from circulation, and burn-on transactions, where transaction fees are burned. This scarcity makes the currency more valuable as fewer coins are available for trading. Baby Dodge Coin, Solidus Ai Tech, and Volt lnu V2 are some examples of deflationary crypto.
While inflationary vs deflationary cryptocurrency works on different principles, both aim to maintain the value of the digital assets they represent.
Factors Behind Economics of Inflationary and Deflationary Cryptocurrencies
Now that you’re clear on inflationary vs deflationary cryptocurrency, let’s understand the factors to assess the long-term viability and potential impact of inflationary and deflationary cryptocurrencies within financial markets. These digital currencies have different ways of controlling their supply, which affects how people use them.
Factors like how much people want them, how inflationary and deflationary cryptocurrencies are used, and how their supply is managed all play a part in their value. Understanding these factors helps us see how inflationary vs deflationary cryptocurrency fits into the bigger picture of money and investing.
Maximum Supply
The total number of coins that a cryptocurrency will ever produce is referred to as its maximum supply. The maximum supply of inflation crypto coins tends to increase over time, enabling a constant supply of new coins. Deflationary crypto, on the other hand, usually has finite or falling maximum supplies, which gradually creates scarcity.
Circulating Supply
Circulating supply refers to the number of coins actively available for trading in the cryptocurrency market, excluding those held by the project team or locked up in reserves. It is essential for assessing the liquidity of a cryptocurrency because more circulating supplies usually lead to more trading activity and stablecoin.
Total Supply
The maximum quantity of coins that can ever be produced for a cryptocurrency is known as the total supply. It includes all coins that are in circulation as well as any that the project team has locked, reserved, or retained. The total supply of a cryptocurrency tells its overall scarcity as well as any possible pressure of inflationary and deflationary cryptocurrencies that can impact its value.
Basis for Inflationary and Deflationary Cryptocurrencies Comparison
To understand inflationary vs deflationary cryptocurrencies, we need to assess factors such as supply dynamics, market sentiment, utility, and economic stability. Inflationary currencies give rise to spending and circulation, while deflationary currencies promote holding and investment. As an investor, understanding inflationary vs deflationary cryptocurrency can help you evaluate the suitability and potential risks associated with each type of cryptocurrency.
It is also essential to understand tokenomics (the economics of cryptocurrencies). Tokenomics refers to the manufacturing, distribution, and quality aspects that are described in the whitepaper of a cryptocurrency.
For example, fixed-supply cryptocurrencies often see declining supply over time, leading to rising demand and value. Whitepapers can be useful in pointing out these differences, but inflationary cryptocurrencies like Ethereum shouldn’t be completely overlooked. Their ecosystems can withstand economic downturns even in the face of infinite supply because of features like Ethereum’s yearly mining cap, which helps control inflation rates and long-term supply-demand dynamics.
Demand and Supply
The principles of supply and demand have an impact on the value of cryptocurrencies that experience inflation as well as deflation. While deflationary currencies can see value appreciation as a result of restricted supply and increased demand, inflationary coins can experience potential devaluation as their quantity grows.
Price Value
Because of constant supply growth, inflation crypto coins can have trouble holding onto their value over time, which could result in devaluation. Deflationary crypto, on the other hand, manages to retain its value through its lowered supply, creating scarcity, and promoting holding or investment.
Purchasing Power
The ability of a currency to purchase goods and services is known as its purchasing power. With their increasing supply, because their price value will decrease, inflationary currencies are likely to experience a decline in purchasing power as costs rise. Deflationary currencies preserve or improve their purchasing power by lowering their supply, which can provide some protection against the depreciation of value brought on by inflation.
The Bottomline
Knowing about inflationary vs deflationary cryptocurrencies helps us understand how their values change over time. In simpler words, inflation makes money worth less, while deflation makes it worth more. Factors like how much of a currency exists and how it’s used affect its value. People who invest in cryptocurrencies need to think about these affecting inflationary vs deflationary cryptocurrency to make smart choices. It’s like understanding how a game works before deciding how to play it well.
In the context of inflationary vs deflationary cryptocurrency, DeFi plays a crucial role in shaping the ecosystem’s dynamics. With DeFi, you can earn rewards by lending your cryptocurrencies, providing money for trades, and trading cryptocurrencies without a middleman.
You can stay ahead of the curve with Blockverse, your trusted source for web3 insights.
Frequently Asked Questions
1. Which cryptocurrencies are deflationary?
Baby Dodge Coin, Spore, and EverRise are examples of deflationary crypto. If you’re interested in cryptocurrencies that rise in value over time, these are worth looking into. Their supply decreases gradually, making them more desirable to investors.
2. Is deflation good for crypto?
Deflation can help cryptocurrencies by making them rarer, which can raise their value. But if deflation happens too much, people might not want to spend the cryptocurrency, and it might not be used much for buying things.
3. Can crypto cause deflation?
Crypto doesn’t cause deflation. Crypto tokenomics determines if there will be deflation. Tokenomics can cause deflation when they dictate that supply decreases over time due to mechanisms like token burning or fixed supply caps. This decrease in supply has the potential to raise scarcity, which could increase the price of cryptocurrencies and maybe put the market under deflationary pressure.
4. What does deflationary mean in crypto?
In the context of crypto, deflationary refers to attributes of tokens that cause a reduction in their supply. The goal of this supply decrease is to cause scarcity, which could increase the cryptocurrency’s value. You can achieve deflationary features by means of fixed supply caps or cryptocurrency tokens burning.
5. Is Bitcoin an inflationary or deflationary currency?
A cryptocurrency could either be inflationary or deflationary, depending on how its total supply changes over time. As the supply of bitcoin increases over time, bitcoin can be considered inflationary. But as Bitcoin’s purchasing power increases over time, bitcoin can be considered deflationary.
6. Which coins have a limited supply?
Cryptocurrencies like Bitcoin (BTC), Cardano (ADA), and Litecoin (LTC) have limited supplies. Bitcoin has a maximum supply cap of 21 million coins, Litecoin’s maximum supply is set at 84 million coins, and Cardano’s at 45 million coins.
7. What are the top crypto assets with unlimited coin supply?
As of April 2024, some of the top cryptocurrencies with unlimited coin supplies include Ethereum (ETH), Solana (SOL), Binance Coin (BNB), and Shiba Inu (SHIB).
