Inflation has become a major issue in the global economy, impacting both businesses and individuals alike. It erodes the purchasing power of currencies around the world, meaning that it now takes more fiat or cryptocurrency blockchain over traditional databases to purchase something now than before.
At lower levels, inflation can be beneficial and spur economic growth. But when the rate is too high, the consequences can be extreme. While many people understand how inflation affects fiat currency expenses, they may not have a full understanding of inflationary cryptocurrencies and deflationary ones. In this article, we will learn what these terms mean.
About Inflationary Cryptocurrencies
Inflationary cryptocurrencies are cryptos that depreciate over time due to tokenomics. Such tokens typically have an ever-increasing or infinite supply, outpacing demand and thus leading to a decrease in the coin’s price. Through inflationary mechanisms, the number of coins in circulation for an inflationary cryptocurrency can increase over time.
This encourages greater participation on the platform and contributes to downward pressure on coin prices making it unfavourable for long-term investors or HODLers. Nonetheless, volatility presents potential investment opportunities. Cryptocurrencies can be incredibly volatile, and many of the top currencies in circulation are inflationary. For those looking to invest over a shorter period, cryptocurrencies may present an intriguing option due to their wide price swings.
About Deflationary Cryptocurrencies
With a deflationary cryptocurrency, the number of coins available is fixed. When demand increases and new coins can no longer be released, this leads to increased value over time. In other words, these cryptocurrencies become more valuable as they get closer to their total supply limit.
Deflationary cryptocurrencies may prove to be more beneficial for HODLers than those with an inflation model. This is due to their limited supply, meaning that when demand increases, the value of deflationary coins also rises — allowing holders to reap greater rewards from selling them. Furthermore, as fewer of these cryptocurrencies are available on the market over time, users can expect their purchasing power to increase accordingly.
Which factors determine the inflationary and deflationary state of cryptocurrency?
When considering which cryptocurrency to invest in, evaluating the inflationary or deflationary nature of an asset can be critical. Many cryptocurrencies are known for their wild price changes within short periods; however, it is also important to consider what a specific coin’s value will look like over a longer period. Deflationary assets have limited token supplies, making them attractive options if you plan on holding onto your coins over the long term. When assessing whether a given cryptocurrency is either inflationary or deflationary, several factors need to be examined.
Circulating Supply
Researching a specific cryptocurrency will also likely give you an insight into its circulating supply. This tells us the number of coins that are currently available to be bought or sold – not including those which have been burned, staked, or otherwise removed from circulation. For users to gain more wealth and rewards, platforms often encourage them to stake their tokens in various ways; thus decreasing the number of tradable coins in the circulating supply.
Total Supply
The total supply of tokens is the total number of tokens created, mined and in circulation, minus any lost or burned. Deflationary cryptocurrencies reduce their total supply by burning some of their existing coins (e.g., Ripple’s XRP) whereas inflationary cryptocurrencies can have an infinite or increasing number of tokens available.
Maximum Supply
Uncovering the tokenomics of every cryptocurrency is a straightforward process that can be done online. In particular, it’s critical to look for the maximum supply of each currency. A deflationary cryptocurrency has an immutable limit on its supply which means no extra tokens will enter circulation through mining, minting or other mechanisms after reaching the set amount detailed in its white paper.