In this article, you will learn how to do inflation and deflation affect cryptocurrencies. Inflation and deflation constitute arguably the most important fiat currency economic movements, due to the extent to which they affect economics on both the micro and macro levels. Cryptocurrency inflation and deflation refer to how the overall purchasing power of a specific cryptocurrency changes over time.
How Do Inflation and Deflation Affect Cryptocurrencies?
Cryptocurrencies have a different relationship to inflation and deflation from fiat currencies, as they are not yet as entangled in the global economy and are built differently. However, crypto coin prices can be affected by fiat deflation and inflation, in accordance with the purchasing power the public.
During inflation, there's an increase in money supply. Hence, when the world-wide economy has more money in it, and BTC has a fixed number, the fiat currency cost of Bitcoin will rise. The value of the Federal Reserve's assets is an indication of how much money they're allowing to be printed. Its size has grown since 2007 from $1 trillion to over $8 trillion in 2021 as per the federal reserve website. Thus, it naturally follows that Bitcoin's price has been on a general upward trend.
In the event of a deflationary economy, the price of Bitcoin tends to fall. An example of this happening is the COVID-19 pandemic. The below chart shows the price of Bitcoin during the course of the pandemic. The deflation that took place during this time was due to people in lockdown spending less, while businesses maintained the same overhead costs and inventory. Bitcoin's price collapsed in parallel. This was because some people may have needed to cash out their Bitcoin, while others would have seen as this natural collapse, as the pandemic was incessantly dragging down prices. If the supply of fiat money is on the decline, then the Bitcoin price will likely follow.
What Are Inflationary And Deflationary Cryptocurrencies?
- Inflationary Cryptocurrencies
An inflationary cryptocurrency is one with an increasing number of tokens in circulation. Some of the common approaches for introducing new tokens through mining, staking, and other methods can help in increasing the circulating supply of tokens. The increasing supply of the token would cause a drop in its value. As a result, users have to spend more tokens for purchasing a specific product, asset, or item.
Dogecoin is the best example of inflationary cryptocurrencies in an inflationary vs deflationary cryptocurrencies debate. One of the creators of Dogecoin removed the hard supply cap of 100 billion DOGE in the year 2014. The move was particularly directed towards the assured assuming an unli Subsequently, the supply of the token could easily outpace demand, thereby decreasing the value of all Dogecoin tokens.
- Deflationary Cryptocurrencies
Deflationary cryptocurrencies are the ones where the supply of coins would decrease over the course of time. Therefore, the value of every coin would increase even in scenarios with consistent demand. On the other hand, different projects use unique deflationary initiatives for specific objectives. A detailed understanding of deflationary cryptocurrencies is an important requirement to learn the difference between inflationary and deflationary cryptocurrency alternatives in the market.
One of the examples of showcasing deflationary cryptocurrencies refers to the crypto exchange Binance. TThe crypto exchange destroys a few of its native Binance Coins or BNBs to reduce the supply every quarter. Similarly, the crypto exchange Polygon also burns its native MATIC tokens to reduce supply of the token.
Bottom Line
Deflation and inflation can have both positive and negative repercussions for both fiat and cryptocurrencies. And this article explains how do inflation and deflation affect cryptocurrencies.
