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What is Inflation in a Crypto: Know the Good and the Bad

You have probably heard the word ‘inflation’ quite a bit in the past few months. While the exact meaning isn’t always clear, the effects are undeniable. You also hear the rising of gas and food prices and even shortages in some cases. Overall, this means a generally lower standard of living, and these things directly result from inflation and can cause lasting changes.

But is the crypto industry also affected by inflation? Is it good or bad for those who buy crypto australia or any crypto enthusiast who invests in different cryptocurrencies? Read this article to find out.

Inflation Defined

The most basic definition of inflation is the loss of value in a currency. When this happens, the purchasing power of your money decreases while prices increase.

For example, with 20 dollars,  you can buy an entire meal from a fast-food restaurant. However, that 20 dollars loses its value over time with inflation, and it might only be enough to get you a sandwich from that same restaurant in the near future. Inflation happens all the time, and though it sounds frightening, it’s not as bad as it seems.

While economists can’t stop it, governments try to limit it. They manage this because the government and central banks are backed by fiat currencies instead of gold. This backing allows them to maintain control over it and take steps to prevent inflation from getting too high.

If inflation is too high, it can hurt the national economy by decreasing economic growth. If consumer spending in the general public is down, there is less money in circulation.

The Benefits of Inflation in the Economic Model

Inflation isn’t always bad. Assets such as land, gold, and cryptocurrencies can increase their value. Since cash is no longer a reliable resource, demand for other assets increases. As a result of inflation, Bitcoin and other cryptocurrencies benefit from it. Inflation affects currencies like the dollar, and demand goes down, Cryptocurrency is the alternative.

Additionally, since inflation affects their currency, some countries build their economy around that. Keeping inflation rates relatively high can attract foreign investors. Even with high inflation, investments pouring in can counter the effects. An example of this is Japan which has the third-largest economy globally yet with a relatively weak currency. Their secret is a nearly unlimited supply of money from the constant investment. Since the Yen is so cheap, consumer prices in Japan are some of the lowest in the world.

The Risk and Downside of Inflation

Hyperinflation is when the currency spirals out of control and becomes worthless. It can get so bad that some countries rely on the US dollar to pay for things. However, the difference is that there is no investment coming in here.

There are several reasons why that is the case. When a government can’t control inflation, interest rates tend to be higher. Governments do this to compensate for the lack of purchasing power. However, that also defeats the advantage investors look for in places like this: low start-up costs.

Second, high inflation rates are also a common cause of political and social unrest. It isn’t uncommon to find protests, widespread criminal activity, and terrorist groups in countries with hyperinflation. These make investors less inclined to invest in these countries due to security concerns.

Inflation in Digital Currency

Cryptos are subject to the law of supply and demand. When more digital money is being mined or issued than burned, they are inflationary tokens, which means more money is coming in than taken out. When too much supply becomes available those assets’ value will decline, which causes inflating prices.

Inflationary Tokens and Its Effect on Token Holders

We should first define what an inflationary token is before discussing its effects. You consider a token inflationary when its net amount is constantly increasing, which means that the number of tokens is continually growing. Bitcoin works under this model, with its number cap at around 21 million coins.

We have not reached that cap, so the number is still increasing. That means supply is still growing, and there is plenty of token distribution.

However, like with inflation, the product’s actual value can go down as supply increases. If the supply gets too big, it can cause prices to go down. That is why a program known as halving is present in the Bitcoin protocol.

This method halves the discovery rate for new Bitcoin every four years. This protocol slows down the currencies supply and prevents it from going out of control. Being able to control supply means Bitcoin becomes more predictable for investors making smart contracts.

The Rise of Token Supply

Too much supply affects cryptos and the dollar. When there is too much supply, the total value of that item goes down. If you keep printing, you destroy it.

The value of crypto, and any good, depends on how rare it is. Why should people expect to pay for something when they can find it lying around wherever they go. Something like Bitcoin takes an effort, so having it far too easy for people to see can be a problem. People will be less willing to pay for these tokens if they are easy to get.

If anything, inflation and too much supply can turn people off and have them looking for alternatives for their finances.

Inflation in Fiat Currencies vis-à-vis Inflation in Digital Currency

The relationship between traditional money and digital assets is interesting. The inflation of our traditional currency is what got people to begin taking Bitcoin seriously.

When Bitcoin was still new, it was almost worthless as a currency. However, that all changed when the global financial crisis happened. Since prices are increasing, people are now less willing to spend their money. Usually, people rely on their bank accounts to save their money for a rainy day.

However, the wealth you have in your savings account loses its value with inflation, and that means your pool of resources only continues to decrease. When this happens, people turn to place their wealth in assets that maintain their value. That is a need that cryptos can answer.

Unlike your bank account, Bitcoin and other cryptocurrencies were unaffected by inflating prices. In many ways, crypto has become the perfect place to store your money for the time being.

Cryptocurrencies do not depend on the government to prop them up. Instead, they are like land and property. Instead, the value of Bitcoin comes from the blockchain network it uses.

Supply didn’t grow out of control because Bitcoin mining happens steadily. What does increase is the demand for it. Many people now store their assets in Bitcoin wallets and other cryptocurrencies.

Digital tokens have become part of people’s investment portfolios even after the economy recovered from the pandemic. It’s now the alternative to the banks that people can turn to when banking isn’t profitable.

Conclusion

Like other commodities, crypto is susceptible to inflation. There will always be ups and downs with the prices. Cryptocurrencies are a proven means of storing as an investment despite these issues.

When traditional means cannot help you, places like Bitcoin can become an alternative. Having it ready helped keep many people afloat during the difficult years of the recession.

However, not everything is perfect with these new cryptocurrencies though, and there is a reason some people are still reluctant to invest in them. It can still be susceptible to inflated prices even with stopgaps in place. In the short term, you can continue to expect those issues to persist.

Another is that, at the moment, digital money is still somewhat volatile, and you can expect the costs to continue going up and down.

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