Cryptocurrencies can fall into several categories. It can be a coin, a token, a stablecoin, a wrapped token, and many more. Cryptocurrencies can also be inflationary or deflationary. But what is the difference between these two classifications? What makes cryptocurrencies inflationary or deflationary?
The importance of supply limits
The supply cap plays an important role in whether a cryptocurrency is inflationary or deflationary. Supply limit refers to the maximum amount of any given coin or token that can be put into circulation. Naturally, this varies depending on the cryptocurrency at hand. For example, Bitcoin has a relatively low supply limit of 21 million BTC, while Ethereum has no cap at all.
It is very rare for the supply cap to change and this limit can affect how cryptocurrencies perform in the market.
Growth and recession
It is also key to fully understand inflation and deflation before engaging in inflationary and deflationary cryptocurrencies.
In short, inflation refers to a decrease in the purchasing power of a currency or asset. In the real world, this often happens due to the increasing cost of living (thoughts, fuel, food, products, luxury goods, etc.). Deflation, on the other hand, involves an increase in the purchasing power of a currency due to a decrease in the cost of living of a country. It may seem like a good thing, but it could indicate a flawed economy.
In the crypto world, inflation and deflation are more related to the supply of a given coin or token than to its purchasing power (although they are related). This is where inflationary and deflationary cryptocurrencies come into play.
What is Inflationary Cryptocurrency?
Inflationary cryptocurrencies are cryptocurrencies with an increasing number of circulations. Dogecoin is a prime example of an inflationary cryptocurrency, as it has no supply limit and increases its circulation to millions of DOGE per day through its mining. Originally, Dogecoin was designed to have a supply limit of 100 billion DOGE, but its developers removed this limit in 2014 and its supply now stands at over 132 billion DOGE, a single figure. is increasing continuously.
The majority of cryptocurrencies are inflationary, as many have not reached their supply limits or have an infinite supply. In addition, cryptocurrency mining is extremely popular right now, with millions upon millions of coins entering circulation every day. This is why many cryptocurrencies have a growing supply.
Bitcoin can also be considered inflationary, although some argue that it is, in fact, a deflationary coin. For now, it is safe to say that Bitcoin is inflationary because its supply is increasing. But this will no longer happen in the future. When Bitcoin’s supply limit is reached, it becomes a deflationary coin.
What is a deflationary cryptocurrency?
Deflationary cryptocurrencies have a reduced circulating supply. They are generally rarer in the market than inflationary cryptocurrencies.
Take Cardano (or ADA) as an example. This cryptocurrency has a supply limit of 45,000,000,000 ADA. You may think it is unlikely that 45 billion ADA will be mined, but don’t forget that many miners are working around the clock to mine coins and tokens. This is why over 33 billion ADA has been in circulation.
When the day comes when Cardano’s supply limit is reached, it will become a deflationary cryptocurrency, as its supply will no longer grow as it currently has. The same goes for other cryptocurrencies with a supply limit, like Binance Coin, Bitcoin Cash, and Algorand.
When mining is no longer possible, that is bad news for the mining industry. However, if the supply of a coin can no longer meet the demand, it is likely to increase in price.
Inflationary and deflationary cryptos have different pros and cons
While some investors prefer deflation to an inflationary cryptocurrency or vice versa, the truth is that both cryptocurrencies have their perks and downsides. While inflationary cryptocurrencies can lead to an oversupply scenario, they allow the mining industry to continue indefinitely. But deflationary cryptocurrencies provide the result of a price increase, which is also a big plus for investors. Time will tell whether such cryptocurrencies will indeed rise in price when their limits are finally reached.
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