Cryptocurrency can fall into several categories. It can be a digital currency, a token, a Stablecoin, a token and more. Cryptocurrencies can also be inflationary or deflationary. But what is the difference between the two classifications? What makes a cryptocurrency inflationary or deflationary?
The importance of supply limits
Supply limits play an important role in determining whether a cryptocurrency is inflationary or deflationary. A supply limit indicates the maximum amount of any digital currency or token that can be put into circulation. Naturally, this depends on the cryptocurrency in question. Bitcoin, for example, has a relatively low supply limit of 21 million BTC, while Ethereum has no limit at all.
The supply limit rarely changes, and this limit can affect the behavior of cryptocurrency in the market.
Inflation and deflation
You also need to fully understand inflation and deflation before moving to inflationary and deflationary digital currencies.
In short, inflation involves a decrease in the purchasing power of a currency or asset. In the real world, this usually results from the ever-increasing cost of living (think fuel, food, groceries, luxury goods, etc.). Deflation, on the other hand, implies an increase in the purchasing power of a currency because of a country’s falling cost of living. This may sound good, but it may indicate that something is wrong with the economy.
In the cryptocurrency world, inflation and deflation are related to the supply of a particular coin or token, not to its purchasing power (although this is true). This is where inflationary and deflationary cryptocurrencies come in.
What is inflationary cryptocurrency?
Inflationary cryptocurrencies are those that are constantly increasing in number. Dogecoin is a prime example of an inflationary cryptocurrency, as its supply is not limited and its turnover increases by millions of DOGE per day as it is mined. Dogecoin was originally designed to have a supply limit of 100 billion DOGE, but its developers removed that limit in 2014, and the current supply is over 132 billion DOGE, a number that is constantly growing.
Most cryptocurrencies are inflationary because many of them have not yet reached their supply limit or have unlimited supply. In addition, cryptocurrency mining is incredibly popular right now, with millions and millions of digital currencies being traded daily. This is why the supply of many cryptocurrencies is on the rise. If demand lags behind supply, their prices will theoretically decline in the long run.
Bitcoin can also be considered an inflationary currency, although some argue that it is actually a deflationary currency. At the moment, it is safe to say that bitcoin is inflationary because its supply is increasing. But that won’t be the case in the future. Once Bitcoin’s supply limit is reached, it will become a deflationary currency.
What is deflationary cryptocurrency?
Deflationary cryptocurrency has a reduced circulating supply. Which tend to be much rarer in the market than inflationary cryptocurrencies.
Take Cardano (or ADA), for example. This cryptocurrency has a supply limit of 45,000,000,000,000 45 33 ADA. You might think that there is no chance of mining XNUMX billion ADA at any time, but don’t forget that many miners are working around the clock to mine cryptocurrencies and tokens. That’s why there are already more than XNUMX billion ADA in circulation.
When the day comes when Cardano’s supply limit is reached, it will become a deflationary digital currency where supply will not increase in the current way. The same applies to other cryptocurrencies with a supply limit, such as Binance Coin, Bitcoin Cash and Algorand.
When cryptocurrency can no longer be mined, this is bad news for the mining industry. However, if the supply of cryptocurrency can no longer meet demand, there is likely to be an increase in prices.
Inflationary and deflationary cryptocurrencies have different pros and cons
While some investors prefer deflationary cryptocurrencies over inflationary ones or vice versa, the truth is that both types of cryptocurrencies have their advantages and disadvantages. While inflationary cryptocurrencies can lead to less demand than supply, this allows the mining industry to continue indefinitely. But deflationary cryptocurrencies are presented as a result of higher prices, which is also a huge advantage for investors. Time will tell if these cryptocurrencies will really see such momentum when their limits are finally reached.