Learn Cryptocurrency
23 Feb 2022

Inflationary and Deflationary Crypto Assets Explained: Why this Discussion is more Important than you think

Ananda Banerjee

Inflation, deflation, and all that financial lingo might sound a bit overwhelming, right! Fret not as the concepts aren’t as hard as you have known them to be. And as far as the discussion is concerned, ‘Chill Stuff’ ahead! So sit back and understand what inflationary and deflationary crypto assets are all about and why it is essential to know a bit more about them in order to pick the right ones.

But first, Let’s get back to school and touch up Inflation and Deflation all over again. 

Key Takeaways

  • The concept of inflation and deflation isn’t restricted to conventional economic setups.
  • Inflation and deflation in the crypto realm are related to demand and supply.
  • You can follow the nature of the demand and supply by looking at the tokenomics
  • Max supply, total supply, and circulating supply are the key metrics to determine inflation and deflation in the crypto realm.
  • Disinflationary crypto assets are also important as they exhibit decreasing inflation rates.

Inflation and Deflation: The Economics

Before we take up the inflationary and deflationary aspects of crypto assets, let us revisit these terms, albeit from a simpler point of view.

Imagine ordering a pizza. Once it arrives and you have four mouths to feed, you can either cut the same into four pieces, with each getting one or 16 pieces with each getting 4. Either way, the volume of pizza reaching every mouth remains the same, but the value per piece reduces once it’s segregated into 16 pieces.

This is exactly how inflationary assets work. While we wouldn’t go into complex economics, for now, inflationary assets are the ones where demand outpaces supply, thereby causing a rise in the value of the asset itself. Just like a single piece of pizza!

Fiat currencies are inflationary in nature as the supply can be increased at will, which reduces the value of the single currency unit as the cumulative economic activity remains constant.

On the other hand, deflation is a standard economic term that signifies reduced demand and increased supply. While deflation, in a standard scenario, can lead to recession and a decline in the availability of goods, it in a way increases the currency’s or asset’s purchasing capability. 

Inflationary and Deflationary Crypto Assets Explained

Unlike fiat currencies and their economic implications, leading to inflation and deflation, crypto assets have a more defined take on these concepts. An inflationary crypto player has a system where the coins keep increasing over time. Similarly, a deflationary cryptocurrency is a system where the coins reduce over time, either with minting rewards lowering in time or the tokens burning out periodically. 

Inflationary, Disinflationary, and Deflationary

Factors that Determine the Economics

Now that you are aware that the inflationary and deflationary nature of crypto assets is directly related to the coin supply, it is important to take note of a few important elements before proceeding any further.

Maximum Supply

Certain crypto players have a set number of coins that can ever circulate in the given blockchain. Well, if you follow Bitcoin closely, you would know that there can only be 21 million bitcoins.

Circulating Supply

The number of cryptos synonymous with a particular Blockchain, currently moving around on-chain, is termed the total supply.

Total Supply

The number of coins created or mined up till now is collated as the total crypto supply. In certain cases, total supply is used interchangeably with circulating supply. 

Crypto Tokenomics: The Best Way to Understand Crypto Inflation and Deflation

In the end, it all comes down to the demand and supply of the concerned crypto asset. And what matters is the quality of the coin, overall production, and even the distribution of the same, factors which are collectively termed Tokenomics. 

Crypto tokenomics is a term that is often released with the blockchain’s whitepaper, revealing whether the native coin has an unlimited, ever-increasing supply or a fixed and even reducing supply. 

Crypto players with fixed coin supply, like Binance Coin, Bitcoin, Cardano, and even Ripple, are expected to show reduced supply and higher demand in the future, making them prone to achieving a higher valuation over time. 

Inflationary vs. Deflationary Crypto Assets: You Would be Surprised

Contrary to popular belief, inflationary crypto assets, i.e., the ones with an unlimited supply like Dogecoin and Ethereum aren’t all that bad. While they might still experience higher supply and lower demand, it is important to note that crypto-ecosystems aren’t as prone to economic downturns as the standard fiat setups. 

Therefore, even if the coin supply is unlimited, it doesn’t actually affect the bigger picture, i.e., the long-term demand and supply. Confused!

Imagine Ethereum, which has ETH as the native, unlimited currency. Despite having no hard capping, the Ethereum blockchain is programmed in such a way that only a fixed amount of ETH can be mined each year. Therefore, if the supply of ETH till now is valued at a market cap of 100 million, only 18 Million ETH can be mined every year, making the inflation percentage stand at 18%.

But then, as the market cap of ETH increases over time, i.e., say 200 million, the fixed 18 Million mined ETH translates into an inflation rate of 9%, which works in favor of the Ethereum ecosystem. Therefore, when the crypto ecosystem is concerned, an inflationary profile isn’t all that bad.

Inflationary, Deflationary, and Disinflationary: The Third Cog in the Crypto Wheel

Apart from inflationary and deflationary crypto assets, the existing arena also brings a new player into the mix. That is the ‘Disinflationary’ cryptocurrency. Unlike deflationary coins like XRP, Bitcoin Cash, and Binance Coin that even burn coins to boost prices further, disinflationary crypto-assets do add new coins to the chain, but with an eye on gradually decreasing the inflation rate. 

This makes the relevant crypto assets stay ahead of the inflation parameter, and that too without having to limit the token supply. 

Fact Check: Did you know that Bitcoin is disinflationary in nature even though new coins are added with each mining effort, the rewards are halved after every four years, making the standard inflation rate less than 2%. 

How do Crypto Inflation, Disinflation, and Deflation fit into the existing Realm?

The existing demand and supply of a particular crypto asset influence its token price, both in the long and short term. However, regardless of what transpires within the Blockchain ecosystem, it eventually comes down to user preferences, use cases, token distribution, and overall mining structure or, rather, the consensus mechanism. 

Wrap-up

And unlike traditional economic setups where a higher inflation rate can lower the value of the concerned currency, the crypto space is a continually evolving one where the market cap keeps increasing to account for the unlimited coin supply, making it somewhat disinflationary in nature. 

FAQs

Q1. What are the top crypto assets with unlimited coin supply?

A1. Ethereum (ETH) and Dogecoin(DOGE) are some of the more popular crypto assets with unlimited coin supplies. However, if you look at crypto tokenomics carefully, this inflationary nature works in favor of these crypto players.

Q2. Which coins have a limited supply?

A2. Top crypto players like Bitcoin, Cardano, XRP, Avalanche, and Litecoin have limited supplies. However, among these, Bitcoin is disinflationary, whereas XRP is deflationary, as XRP coins are burned to boost prices.

Q3. When is Bitcoin expected to hit the max supply limit?

A3. Based on the current Bitcoin halving rates, the 21 million coin limit is expected to max out by 2140.

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Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Ananda Banerjee

Content Writer

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