Introduction
Cryptocurrencies are being developed to compete against traditional forms of finance and cash, such as paper money. It is significant because it indicates that cryptocurrencies are capable of performing every financial function on a decentralized basis in place of fiat currency. Because of this, it also indicates that blockchains and cryptocurrencies have the potential to have a substantial impact on the economy.
Exchanges of stocks, commodities, real estate, and fiat currency are the central byproducts that, according to the conventional school of thought in finance, decide the path that an economic system will take. On the other hand, in DeFi blockchains, stablecoins, network-based tokens (NFTs), Web3 apps, decentralized applications (dApps), and cryptocurrencies all play the same function in the economic process. In terms of the effects that they have on the economy and the functions that they perform, cryptocurrencies can be classified as either inflationary or deflationary assets.
What exactly is inflation, then?
One of the problems that might arise in an economic system is inflation. It occurs when the prices of products and services rise in contrast to the prices that were in effect during the prior period. There is a school of thought amongst certain economists that a steady and moderate rise in inflation is an indication of a prosperous and expanding economic system. On the other hand, there are also circumstances in which inflation is the consequence of a more significant economic setback, such as a recession. In 2022, the United States of America will likely have an increase in inflation of 8.2%, which will be more than what government regulators had anticipated and will be the highest level seen in the last 40 years.
What exactly is Deflation, then?
The reverse of inflation is deflation, and for consumers, this is nothing but good news. Deflation is the inverse of inflation. When the cost of living, in general, falls over time, this phenomenon is known as deflation. Deflation may also imply that an individual’s purchasing power will increase as a result of the economy as a whole, which is a positive development.
The rise in the value of the fiat money or legal tender in a particular location is what causes deflation to occur in that region. It is also possible for this to occur as a result of an increase in the supply of aggregate output in a country along with an increase in the productivity of that production. Deflation typically occurs when there is a restricted supply of a country’s fiat currency, which can be seen as a sign of economic weakness.
Inflation and Deflation: Key Distinctions
At its most fundamental level, inflation and deflation are the direct products of the total amount of money in circulation. It indicates that deflation occurs in a country when there is a restricted supply of the country’s fiat currency because this is what causes it. Because there is less money in circulation, the value of each note has increased. This means that individuals are able to trade the same amount of money for a greater quantity of goods or services because each note is worth more. On the other hand, inflation takes place when a country’s money supply is either growing at a rapid rate or is readily available in a sizeable quantity.
Because there is such a large amount of money in circulation, the value of the legal tender, in and of itself, decreases. As a direct consequence of this, individuals are required to part with a greater sum of money in order to acquire the same amount of products or services as in the past. It can appear as though inflation is a serious problem; nevertheless, it is interesting to remember that deflation that lasts for a longer period of time might bring the economy to a standstill if it continues for long enough. As a result of the fact that deflation has the potential to bring about a recession, central banks work diligently to thwart its occurrence as soon as it becomes apparent.
What exactly is hyperinflation you ask?
It is impossible to reach a conclusion to the conversation about inflation without also addressing the topic of hyperinflation. Typically, capitalist economic systems will make an effort to keep inflation at a level that is manageable, under control, and relatively stable. Nevertheless, there are situations in which inflation can spiral out of control, which indicates that the economy may be vulnerable to the adverse effects of the phenomenon. If the Consumer Price Index (CPI) displays a rate of inflation growth that is greater than 50 percent per month, this indicates that the economy is experiencing hyperinflation.
People may experience problems, such as economic panic, as a direct result of hyperinflation. People may begin stockpiling things in advance because they are concerned that prices will continue to rise. As a consequence, the amount of demand rises to one that is potentially hazardous. People also have the ability to avoid putting their money in banks and other financial organizations, which is another factor that might lead to the failure of these establishments. At the same time, the government is taking in less money through taxes. During times of inflation, the government is unable to provide its citizens with any subsidies on the purchase of necessary products.
What exactly is the term “deflation”?
Deflation and disinflation are two different economic terms, however they are frequently used interchangeably. The rate at which the generally upward trend of inflation in an economic system experiences a periodical slowdown is referred to as disinflation. The pace of change or decline in inflation over a period of time can be measured using a concept known as disinflation. As a consequence of this, it is an independent phrase that must not be confused with deflation.
Can you explain what you mean by the term “inflationary cryptocurrency”?
Inflation and deflation, as shown by the sources cited above, are outcomes of fundamental demand and supply characteristics at the macroeconomic level. The future supply of an asset means that its unit value will decrease if it is expected to increase. Those who hold such a currency will have to spend more in the future to get the same quality of goods and services that they can now get for less. In the same way, digital currencies with a limited or extremely large supply are not a stable form of currency but rather a form of inflation. Dogecoin is illustrative of inflationary assets like it.
In 2014, the dogecoin creator lifted the supply cap of 100 billion. The number of Dogecoins that can ever be created is theoretically infinite. This means that the total amount of Dogecoins available on the market is only expected to grow.
It’s important to remember that new coins, mining, staking, and other mechanisms can all contribute to the perpetual growth of the market supply of inflationary cryptocurrencies. Inflationary pressures are exerted on buyers as a result of a rise in the total number of Dogecoins in circulation.
So, what exactly is a deflationary cryptocurrency?
In contrast to inflationary cryptocurrencies, deflationary tokens become increasingly scarce on exchanges over time. Since demand is higher than supply, the remaining cryptocurrency’s book value will rise as time goes on.
Learn how to better organize your cryptocurrency holdings by first familiarizing yourself with the distinctions between cryptocurrencies based on their total supply mechanism. When it comes to deflationary assets, the Binance coin is a prime example because its total supply is decreasing as time goes on.
The Binance Smart Chain’s native token, Binance Coin (BNB), burns off a certain percentage of its supply every day. In the cryptocurrency world, a Burn address is the protocol used to permanently destroy tokens. According to BSC’s implied schedule, this protocol will be carried out once every three months.
Like other blockchains, Polygon’s native coin MATIC is periodically burned by being sent to “burn addresses.” In 2021, the Ethereum development team will release a protocol that will allow the token to become deflationary by sending a certain amount of ETH to burn addresses, turning Ethereum from a cryptocurrency with an infinite supply into a deflationary token.
Does Bitcoin Cause Inflation or Deflation?
When a cryptocurrency with a potentially infinite supply becomes an inflationary token, its value can also decrease. Contrary to the inflationary asset class, the rules for deflationary assets are different. It means that the value of cryptocurrencies will not decrease over time if their total supply is controlled or maintained.
Thus, in the future, consumers who hold the deflationary cryptocurrency can buy more with the same number of unit tokens. If you’re looking for a deflationary cryptocurrency, Bitcoin is a good choice. The maximum number of Bitcoins that will ever be issued is 21 million.
No cryptocurrency can maintain a stable circulating supply over time. Without proper distribution on a global scale, it would be impossible to issue such a token. But since there will never be more than 21 million Bitcoins in circulation, the supply on the market will never become excessive or steadily increasing.
As a result, Bitcoin becomes a deflationary digital currency. Coincidentally, the Bitcoin blockchain also features a halving protocol that halves Bitcoin mining rewards every four years. It’s yet another method of keeping Bitcoin’s supply high and maintaining a high book value per coin.
To begin, let’s define Algorithmic Stablecoins.
If we’re going to talk about inflationary and deflationary cryptocurrencies, we need to talk about algorithmic stablecoins, too. In the DeFi network, some blockchains serve as “Central Banks,” managing the creation and destruction of their own tokens. Stablecoins, which are a type of cryptocurrency, are distinguished by their consistently low unit price. In the DeFi ecosystem, they serve as a substitute for fiat currency because they are stable and not subject to the same price fluctuations as other cryptocurrencies.
A stablecoin is a cryptocurrency that maintains its value by being “pegged” to another asset, typically a more liquid asset like another cryptocurrency or fiat currency. Algorithmic stablecoins, on the other hand, function as their own central banks without linking their tokens to any external currency.
One such stablecoin is the UST stablecoin, which is based on the TerraUSD. Tokens issued by the Terra network have an intrinsic value that is pegged to that of USTs, the stablecoins used by the network. To keep the book value of UST stablecoin at $1, Terranetwork either mints more tokens or burns tokens that have already been issued. Inflation and deflation, as shown by the sources cited above, are outcomes of fundamental demand and supply characteristics at the macroeconomic level. The future supply of an asset means that its unit value will decrease if it is expected to increase. Those who hold such a currency will have to spend more in the future to get the same quality of goods and services that they can now get for less. In the same way, digital currencies with a limited or extremely large supply are not a stable form of currency but rather a form of inflation. Dogecoin is illustrative of inflationary assets like it.
In 2014, the dogecoin creator lifted the supply cap of 100 billion. The number of Dogecoins that can ever be created is theoretically infinite. This means that the total amount of Dogecoins available on the market is only expected to grow.
It’s important to remember that new coins, mining, staking, and other mechanisms can all contribute to the perpetual growth of the market supply of inflationary cryptocurrencies. Inflationary pressures are exerted on buyers as a result of a rise in the total number of Dogecoins in circulation.
So, what exactly is a deflationary cryptocurrency?
In contrast to inflationary cryptocurrencies, deflationary tokens become increasingly scarce on exchanges over time. Since demand is higher than supply, the remaining cryptocurrency’s book value will rise as time goes on.
Learn how to better organize your cryptocurrency holdings by first familiarizing yourself with the distinctions between cryptocurrencies based on their total supply mechanism. When it comes to deflationary assets, the Binance coin is a prime example because its total supply is decreasing as time goes on.
The Binance Smart Chain’s native token, Binance Coin (BNB), burns off a certain percentage of its supply every day. In the cryptocurrency world, a Burn address is the protocol used to permanently destroy tokens. According to BSC’s implied schedule, this protocol will be carried out once every three months.
Like other blockchains, Polygon’s native coin MATIC is periodically burned by being sent to “burn addresses.” In 2021, the Ethereum development team will release a protocol that will allow the token to become deflationary by sending a certain amount of ETH to burn addresses, turning Ethereum from a cryptocurrency with an infinite supply into a deflationary token.
Does Bitcoin Cause Inflation or Deflation?
When a cryptocurrency with a potentially infinite supply becomes an inflationary token, its value can also decrease. Contrary to the inflationary asset class, the rules for deflationary assets are different. It means that the value of cryptocurrencies will not decrease over time if their total supply is controlled or maintained.
Thus, in the future, consumers who hold the deflationary cryptocurrency can buy more with the same number of unit tokens. If you’re looking for a deflationary cryptocurrency, Bitcoin is a good choice. The maximum number of Bitcoins that will ever be issued is 21 million.
No cryptocurrency can maintain a stable circulating supply over time. Without proper distribution on a global scale, it would be impossible to issue such a token. But since there will never be more than 21 million Bitcoins in circulation, the supply on the market will never become excessive or steadily increasing.
As a result, Bitcoin becomes a deflationary digital currency. Coincidentally, the Bitcoin blockchain also features a halving protocol that halves Bitcoin mining rewards every four years. It’s yet another method of keeping Bitcoin’s supply high and maintaining a high book value per coin.
To begin, let’s define Algorithmic Stablecoins.
If we’re going to talk about inflationary and deflationary cryptocurrencies, we need to talk about algorithmic stablecoins, too. In the DeFi network, some blockchains serve as “Central Banks,” managing the creation and destruction of their own tokens. Stablecoins, which are a type of cryptocurrency, are distinguished by their consistently low unit price. In the DeFi ecosystem, they serve as a substitute for fiat currency because they are stable and not subject to the same price fluctuations as other cryptocurrencies.
A stablecoin is a cryptocurrency that maintains its value by being “pegged” to another asset, typically a more liquid asset like another cryptocurrency or fiat currency. Algorithmic stablecoins, on the other hand, function as their own central banks without linking their tokens to any external currency.
One such stablecoin is the UST stablecoin, which is based on the TerraUSD. Tokens issued by the Terra network have an intrinsic value that is pegged to that of USTs, the stablecoins used by the network. To keep the book value of UST stablecoin at $1, Terranetwork either mints more tokens or burns tokens that have already been issued.
Advantages of XRP Token’s Deflationary Nature
Ripple’s native XRP token takes a novel approach to deflation by limiting the number of tokens that can ever be created. One hundred billion XRP coins were issued simultaneously by the XRP ledger, the sole issuer of XRP tokens. Conversely, in 2017, about 55 million XRP tokens were stored on the same blockchain. Ripple Labs has informed its investors that the frozen XRP tokens will be released into the market in order to sporadically maintain the total supply and provide liquidity. To use the XRP Ledger, users must pay a small percentage of their XRP holdings in gas fees. Deflationary tokens are created when the transaction fees collected by Ripple Labs are sent to “burn addresses,” where they are destroyed.
Distinguishing Characteristics of Both Inflationary and Deflationary Cryptocurrencies
A complex and detailed economic analysis may be required to determine the inflation or deflation of fiat currencies. Cryptocurrencies, on the other hand, have a few distinguishing characteristics that make it easy to gauge whether a token is inflationary or deflationary. Generally speaking, a token is considered inflationary if its total supply is constantly growing.
However, a deflationary cryptocurrency is one in which the total supply of tokens decreases over time. Some other factors can help cryptocurrency investors determine whether a cryptocurrency is deflationary or inflationary. If the reader wants to make an informed judgment, they should consider the following factors:
Restricted Maximum Spending
Whether a cryptocurrency is inflationary or deflationary depends in large part on its supply cap. The token is more likely to be deflationary if the total supply of the cryptocurrency is capped at a fixed number. One such example is Bitcoin, the total number of which is capped at 21 million and will never increase because of this limit. By definition, Bitcoin is a deflationary currency.
Circulation
One of the most important factors in determining whether a cryptocurrency will be inflationary or deflationary is the number of coins in circulation. As a result, some blockchains issue an infinite supply of their tokens but implement protocols to gradually reduce the total amount of tokens in circulation. Consequently, cryptocurrency investors should also consider the circulating supply when gauging whether or not a cryptocurrency is inflationary or deflationary.
Total Available Supply
An additional factor that affects whether or not a cryptocurrency is inflationary or deflationary is the total supply of the entire blockchain. Therefore, if the value of a cryptocurrency consistently goes up or down from the time it was first issued until it was last issued, it can be both inflationary and deflationary at the same time.
How Deflationary and Inflationary Cryptocurrencies Differ
All the fundamentals of inflation and deflation, including how they work and what they mean, have been covered thus far in the article. There is a crucial difference between inflationary and deflationary cryptocurrencies that investors need to understand now. When considering which cryptocurrency to use, it’s important to weigh the pros and cons of both inflationary and deflationary options. Investors in cryptocurrencies would do well to keep the following in mind as they make comparisons:
Token Supply
Token supply plays a crucial role in determining whether a cryptocurrency will cause inflation or deflation. Inflationary effects can be expected from a cryptocurrency if its supply keeps growing. What this means is that as more of the cryptocurrency in question is produced, demand for it is likely to decrease. To rephrase, it is true that inflationary currencies have a larger supply relative to their demand.
Cryptocurrencies that promote deflation are, on the other hand, scarcer and get less so over time. Keep in mind that protocols like “burning addresses” can turn infinite-supply cryptocurrencies into deflationary ones. To put it another way, the token supply of deflationary assets is lower than its demand on the market.
Ability to Make a Purchase
The demand for the inflationary tokens is expected to decrease over time as a direct result of the supply of these tokens being expected to keep growing over time. When a good or service is offered on the market in substantial quantities, individuals do not have to stress about their ability to obtain that good or service since it is considered to be readily available. As a direct result of this, the value of the product has diminished. Similarly, when there is a growth in the supply of inflationary cryptocurrencies, the value of those cryptocurrencies falls, and so does the purchasing power of users.
On the other hand, deflationary cryptocurrencies try to limit the amount of their supply that is available as time goes on. This indicates that in the future, there will be a smaller total number of the same tokens available on the market, even if there are currently a large number of tokens available on the market. As a result, customers will make an effort to locate these tokens, which will lead to an increase in demand from them. Along the same lines, there will be an increase in the prices of these deflationary assets. As a consequence of this, the purchasing power of the individuals who are in possession of those tokens will likewise increase.
Intrinsic Value
In the event of assets that are subject to inflation, the blockchain or the private entity that was responsible for issuing these tokens pushes individuals to make more purchases. Because of this, there is a greater chance that the market’s supply of the aforementioned token will continue to exceed its demand. When investors hold a cryptocurrency that has some worth and the quantity of that cryptocurrency increases on the market, the value of that cryptocurrency is going to decrease. Consequently, investors who hold inflationary crypto currencies want to spend them all as quickly as possible before their value decreases even further.
On the other hand, those individuals who are dealing with deflationary assets attempt to keep a firm grasp on them for an extended period of time. The amount of deflationary assets available on the market is going to continue shrinking as a natural consequence of this situation. Therefore, cryptocurrency investors have the potential to generate more gains so long as they are able to hang on to the assets that benefit from deflation. Therefore, in most circumstances, investors choose to hold their deflationary assets for longer durations.
Conversion
It is possible to convert a deflationary asset into an inflationary one by making its supply unlimited. The same may be said for blockchains utilized by cryptocurrencies such as ETH and Dogecoin. When a cryptocurrency has a limited supply, it indicates that over the course of time, the demand for the cryptocurrency will continue to increase while the total number of tokens will stay the same. As a consequence of this, the supply will begin to decrease in comparison to the demand.
On the other hand, cryptocurrencies have the potential to experience deflation if certain supply management protocols, like as the halving of mining rewards and the burning of addresses, are eliminated from the blockchain. In the same way, it is also feasible to covert an inflationary asset into a deflationary one by limiting its supply and introducing alternatives like burning and reducing mining rewards. This can turn an asset that was previously inflationary into one that was previously deflationary.
Conclusion
When considering the implications of the bitcoin market on the economy, it is essential to acquire knowledge concerning inflationary and deflationary factors. The study of economics is absolutely necessary for any and all financial investors who aspire to become experts in the art of producing money. Investors may make the best decisions and know the optimum time to hold or sell their cryptocurrency holdings if they educate themselves on the dynamics, variables, and critical considerations surrounding inflationary and deflationary cryptocurrencies.
