Inflationary vs Deflationary Cryptocurrencies

After covid pandemic, most countries are struggling economically. Inflation and global recession are topics of discussion around the world. In most countries, including the United States, inflation has skyrocketed. 

Because all fiat currencies are inherently inflationary, one may consider investing in cryptocurrencies to preserve their money against inflation. But did you realize that cryptos are also inflationary? Cryptocurrencies such as Bitcoin and Ethereum, like any other fiat currency, are technically inflationary.

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But there's more to it than that. Inflationary cryptocurrencies and deflationary cryptocurrencies are the two types of cryptocurrencies. In this post, we will learn about the factors that cause a currency to be inflationary or deflationary, as well as the differences between the two.  

Basic Understanding Of Inflation And Deflation

Before we go into the principles and examples of inflationary and deflationary tokens, it's important to understand the definitions of inflation and deflation.

Inflation

Inflation is defined as a decrease in a currency's buying power. Inflation raises the cost of living, thus, for example, if you need $10,000 today to live in the United States for a month, you will need $11,000 the next year to maintain the same quality of life.

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Deflation

Deflation is described as an increase in a currency's purchasing power. If you live in a deflationary economy, your cost of living will be reduced, allowing you to maintain a higher level of life year after year.

Inflationary Cryptocurrency

As we all know, inflationary cryptocurrency should have a decreasing value over time. That means you'll have to spend more tokens over time to get something.

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The circulating supply of cryptocurrency is steadily increased to make it inflationary. In order to increase the number of tokens in circulation, inflationary crypto projects use a variety of mechanisms like staking, minting, and so on. As the number of tokens increases, their value decreases, and the token becomes inflationary.

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As a result, any cryptocurrency with an endless token supply will eventually have more tokens in circulation than demand, causing the value of that token to fall. For example, Dogecoin has a limitless supply cap, thus as time passes, more and more DOGE will enter circulation, lowering the value of each token. 

Deflationary Cryptocurrency

Deflationary cryptocurrencies have a predetermined limit on the total supply of tokens. A deflationary currency is one in which the supply of tokens decreases while the value rises over time.

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The project team decides on a fixed number of tokens that can ever be minted and circulated in order to make a cryptocurrency deflationary. Furthermore, by burning some of the tokens in a timely manner, the circulating supply of these tokens is gradually reduced.

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As a result, after all of the tokens are minted and demand for that token remains constant, the token becomes deflationary and its value rises. 

Inflationary vs Deflationary Cryptocurrency (Table)

So, how do inflationary and deflationary cryptos compare? What are the differences between them, and which is preferable? Let us try to answer all of these questions more clearly with the help of this comparison. 

Which One Is Preferable?

Cryptocurrencies have only been around for a little over a decade. Some cryptocurrencies are only 5-10 years old and have yet to gain traction. As a result, determining which types of cryptos are superior is naive.

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We will only be able to compare inflationary and deflationary cryptocurrencies once they have reached their total limits. As of now, both inflationary and deflationary cryptos have their advantages and disadvantages, as previously noted. 

Conclusion

A supply and demand chain drives the cryptocurrency market. These same factors decide whether a cryptocurrency is inflationary or deflationary. Bitcoin is one popular example of an inflationary cryptocurrency whereas BNB is a deflationary cryptocurrency.

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We hope this post has provided a better understanding of the concepts of inflationary and deflationary cryptos to you. Visit our Hypergrowth blog to discover more about cryptocurrency and the metaverse.

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