January 2, 2023

What Are Inflationary And Deflationary Cryptocurrencies?

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Inflationary and deflationary cryptocurrencies are two different types of digital assets that have different characteristics and implications for the cryptocurrency market.  In this blog, we will take a look at these two types of cryptocurrencies and discuss them so that you are able to make better investment decisions.

Inflation vs Deflation: Quick Differences

Inflation is an increase in the general level of prices of goods and services in an economy over a period of time. This is caused by, for example, an increase in the money supply, as more money is chasing the same amount of goods and services, resulting in a rise in prices.

Deflation is the opposite of inflation; it is a decrease in the general level of prices of goods and services in an economy over a period of time. This is caused by either having a fixed supply or decrease in the money supply, as less money is chasing the same amount of goods and services, resulting in a decrease in prices over time.

Inflationary Cryptos

Inflationary cryptos are a type of cryptocurrency that has an increasing circulation of  tokens entering the market. This is in contrast to a deflationary cryptocurrency, which has a fixed or decreasing supply of tokens.

Some inflationary tokens such as Bitcoin may have a hard cap on coins that could enter the market, but it is still inflationary because the supply needs to be mined over time which increases the amount available until reaching the hard cap.

Some examples of inflationary cryptos include:

With inflationary cryptos, the value of the crypto is increased through the introduction of new coins into the market, either through mining or staking. Having this in place encourages participation from the community which further drives security and the use of a coin.

Deflationary cryptos

Deflationary cryptos are designed to reduce the supply of coins over time, which in turn can increase the value of the coins. This is achieved by implementing a deflationary mechanism, such as burning coins or charging fees.

Some examples of deflationary cryptos include:

When a deflationary crypto is burned, a certain amount of coins are taken out of circulation. This reduces the total supply of coins and increases their scarcity, thus driving up their value. Similarly, when fees are charged, the coins are taken out of circulation and the remaining supply decreases.

Deflationary cryptos are seen as an attractive investment opportunity, as the deflationary mechanism can create a positive feedback loop that increases the value of the coins. This can lead to significant returns for investors.

At the same time, deflationary cryptos can also be risky investments. As the total supply of coins decreases, the risk of large price swings increases. Additionally, as the deflationary mechanism is programmed into the system, there is no way to reverse it. This means that once the coins are taken out of circulation, they are gone forever.

To Conclude

Inflationary and deflationary cryptos are two distinct approaches to cryptocurrency that offer different benefits and drawbacks. Inflationary cryptos are a more traditional approach that can offer some protection against volatility, while deflationary cryptos are a newer approach that can provide more stability and security. Ultimately, the choice of cryptocurrency is up to the individual user, but it is important to understand the differences between the two before making a decision.