Inflation in the world of cryptocurrencies


The global financial system works in such a way that it is impossible to do without the participation of inflation in it. If it turns out that there is no inflation for some reason, then deflation takes its place, and this can be even worse. Inflation is a natural economic process, where there is a money turnover, there will be it. Every year, money becomes cheaper and nothing can be done about it. An ordinary person who does not understand well how investments work can quite easily lose about 5% of his funds, since his money will just lie there and become cheaper.

Cryptocurrency is an alternative financial system, but it is not without the charms of inflation. In this article, we will try to tell you in detail about inflation in the world of cryptocurrencies and what kind of counteraction it has.

Definition

The definition of inflation can be given as follows: it is the increase in prices for goods and services for a certain amount of time. Usually, inflation can be expressed as a percentage. For example: for the year, the ruble’s inflation was 5%. This will mean that the dollar has become cheaper by 5% over such a time period. It turns out that if a year earlier a person could buy goods or use services for $100, now it is already for $95, while the number of bills and their denomination has not changed.

The crypto industry has also not been without inflation, only here it works a little differently. Here the percentages will show the total turnover of new coins issued for the year. Let’s take for example the first cryptocurrency. At the beginning of 2020, bitcoin’s coin turnover was 18,171,000 BTC. At the end of the year, the number of BTC increased to 18,538,000. From this, it can be understood that in 2019, the inflation of the first cryptocurrency was 2%. This is not such a large percentage when compared with a traditional currency, but you can look at an earlier indicator. At the beginning of 2019, there were 16,078,000 BTC, and at the end of 16,755,000. This means that the annual percentage was more than 4%.

The creator of bitcoin, Satoshi Nakamoto, understood the risk of inflation, so he thought out a deflationary model in a digital asset, thanks to which the inflation rate of bitcoin decreases every year. Do not forget that bitcoin is the first cryptocurrency. This means that BTC will always be in demand, since the capitalization of bitcoin is half of the cryptocurrency market.

This is an excellent deflationary model, in which there is a halving every 4 years. Due to the constant reduction of the market supply, bitcoin is less susceptible to annual inflation than other cryptocurrencies.

Of course, if the cryptocurrency has a limited turnover of coins, then it is logical to assume that it will be less subject to inflation. But there is one caveat here, the cryptocurrency will be less devalued if it is actually well in demand among the crypto community. As an example, we can take BSV. Being a hardfork of bitcoin, the same deflationary model is implemented in it. Here you might think that this coin will devalue less every year. But everyone knows that BSV is a scam project and its creation was necessary only for its creators to enrich themselves. If you decide to see how it is doing in the cryptocurrency rating, you can see that it has lost its position by more than 20 points over the year, and its price is far from the historical maximum.

This leads to the conclusion that no matter what deflationary model is in the coin in the first place, if it is not in demand from the crypto community, then its price will fall every year, as will the rating positions.

The most inflation-resistant cryptocurrencies

In the early days of the cryptography industry, people believed that cryptocurrency could not be subject to inflation, so many used it as a haven for assets. But based on the above, time has shown that not all coins have a working deflationary model. Let’s just say you can try to save a fiat from inflation in a cryptocurrency. But you can’t save money from depreciation. This proved well the previous year, together with the policy of quantitative easing. World leaders are doing everything to keep the economy more stable. Only the dollar, which until 2020 was the most stable currency, will now have more than 2% inflation. If you look at the cryptocurrency, you can look at BTC, ETH, XRP, EOS, XLM, ADA. All these coins have the lowest inflation rate. This begs the question: Do ETH and XLM have an unlimited turnover of coins, so how are they exposed to small inflation? A couple of projects from these cryptocurrencies are in demand to create decentralized applications. It can therefore be understood that these coins will be in demand for a long time to come.

Burning of tokens

In one of the previous articles, we talked in detail about burning toxins and why it is necessary. Let’s tell you in a nutshell how it works. At the beginning, we mentioned companies that have their own tokens and coins. These companies, in turn, annually struggle with the inflation of their assets. How it happens: the company creates tokens and most often issues a limited issue, after some time it buys back a certain number of coins and destroys them. This is called burning tokens.  To understand literally that tokens are not destroyed because they remain. They’re just transferred to purses no one else has access to, so the tokens are lost forever. Comparisons can be made with traditional markets. Organizations are also buying up shares to reduce turnover and thereby increase the value of securities. There is one major difference from a crypto market: shares can be implemented in different ways, but tokens have only one scenario – destruction. This method of maintaining inflation is quite popular among crypto companies. Many of them burn their coins to prove their viability and to maintain the normal value of their assets.

Conclusion

What conclusions can be drawn from this article? The cryptocurrency, which has good demand from the crypto community, as well as limited circulation of issued coins, is subject to the least inflation. Also worth remembering are companies that burn their own tokens. Not only do they reduce inflationary pressure, but they can also trigger a rise in the value of the coin. So if you want to save your money from inflation, cryptocurrency is not a bad choice. 

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