One of the most unsettling concepts for an economy is inflation, particularly for the USA, which is ranked first in the world. Inflation in the US is anticipated to be close to 8.5 percent in 2022. Given that the inflation rate was around 7.0 percent in 2021, the increase in inflation stands out as a notable feature. In addition to putting pressure on wage stagnation, rising inflation has also helped prices grow. As a result, the debate over whether cryptocurrencies will cause inflation or deflation has picked up steam recently. Yet why?

Many think using cryptocurrency as a hedge against rising inflation is a good idea. You should also be aware that cryptocurrencies can function as both inflationary and deflationary assets. Will they aid you in preventing inflation? With a thorough comparison of inflationary cryptocurrencies and deflationary cryptocurrencies and their differences, the piece that follows may be able to assist you in finding the solution.

How do inflation and deflation differ?

The distinction between inflation and deflation would be one of the first topics of a conversation about either inflationary cryptocurrencies or deflationary cryptocurrencies. For any cryptocurrency newcomer, both terms might seem to have sprung out of an accountant’s manual. When there is an abundance of money in circulation, the value of the currency decreases, which leads to an increase in the cost of goods and services.

Deflation, on the other hand, denotes an increase in the value of a currency together with a corresponding decrease in the cost of goods and services. It is crucial to remember that deflation results from a lack of available money. To a certain extent, inflation is beneficial since it stimulates the economy by encouraging consumer spending. On the other hand, when prices increase more quickly than wages, inflation can become a severe problem.

Have you noticed how deflation and inflation differ from one another? The currency supply is the answer. Fiat currencies may have their supply increased at will. Hence they tend to be inflationary. The value of a single currency unit decreases because, in any circumstance, the overall economic activity is constant. Lower demand and higher supply are implied by deflation, which can boost the purchasing power of fiat money. What role do inflation and deflation play in the world of cryptocurrencies?

Inflationary Cryptocurrencies

Educating yourself on inflationary cryptocurrency and deflationary cryptocurrency alternatives is critical as more and more people resort to cryptocurrencies as a hedge against inflation. Since cryptocurrencies are subject to the rules of supply and demand, the concepts of inflation and deflation also apply to them.

In a cryptocurrency that experiences inflationary growth in the number of tokens in circulation, The standard techniques for creating new permits through mining, staking, and other processes can aid in raising the total number of tokens in circulation. Users must use more tickets to buy a particular good, asset, or thing. The token’s value would decrease due to the rising supply.

Dogecoin stands out as the best example of an inflationary cryptocurrency in the argument between inflationary and deflationary cryptocurrencies. In 2014, one of Dogecoin’s founders abolished the 100 billion DOGE hard supply cap. The action was specifically intended to guarantee an endless supply of resources. As a result, the collection of the token can be easily more significant than the demand, which would lower the value of all Dogecoin tokens.

On the other side, you can also find other inflationary assets that only exhibit inflation up to a certain point, like Bitcoin. How can a cryptocurrency be an asset with restricted inflation? There may ever be 21 million Bitcoins in circulation because there are 21 million in the current supply. When the supply cap is reached, Bitcoin mining will cease, making it a deflationary cryptocurrency.

It’s interesting how Bitcoin has used a novel mechanism to halve inflation and slow it down. The total quantity of Bitcoins that can be mined and put into circulation is capped every four years by the Bitcoin network. The fact that 19 million Bitcoins are currently in use may have some of you asking why there isn’t much time left to mine the remaining currencies.

On the other hand, the continuously decreasing mining incentives would imply that the 21 million mark might not arrive for many years; with a significant drop in mining incentives, Bitcoin balances between an inflationary and a deflationary cryptocurrency. For instance, the mining reward for 2016 was close to 12.50 Bitcoins. The prizes decreased to roughly 6.25 Bitcoin in 2020, and in 2024 they would round up to 3.125 BTC. Cutting the number of cryptocurrency tokens in circulation is a helpful mechanism.  

Also, read – How Bitcoin is becoming a hedge against inflation?

Deflationary cryptocurrencies

To distinguish between market-available inflationary cryptocurrency and deflationary cryptocurrency alternatives, one must thoroughly understand deflationary cryptocurrencies. Cryptocurrencies that experience deflation would gradually decline in the number of coins available. Therefore, even in scenarios where demand is constant, the value of each currency would rise. On the other hand, several projects employ distinctive deflationary initiatives for definite goals.

The cryptocurrency exchange Binance is one example of showing deflationary cryptocurrencies. Each quarter, the cryptocurrency exchange reduces the supply by destroying a small number of its native Binance Coins, or BNBs. Like Polygon, a cryptocurrency exchange, MATIC tokens are likewise burned by Polygon to reduce the token’s supply.

You should also become familiar with several examples of cryptocurrencies that act as central banks. Such cryptocurrencies preserve the token’s value using both deflationary and inflationary means. A deflationary cryptocurrency such as the TerraUSD or UST stablecoin is the most outstanding example. The TerraUSD network, also known as the Terra Network, creates and burns its tokens to keep the stablecoin’s price fixed at $1.

Understanding Ethereum as a deflationary cryptocurrency can help you better comprehend the difference between inflationary cryptocurrencies and deflationary cryptocurrencies. At one point, Ether, the native coin of Ethereum, was a fully inflationary asset. In contrast, Ethereum released an update in August 2021 that made Ether deflationary when network activity increased. The upgrade added a provision for ETH supply reduction through burning. A tracking website said that more than 1.7 million Ether tokens worth more than $4.5 billion were destroyed.

The use of Ripple as an example demonstrates an alternative method for turning its native token, XRP, into a deflationary cryptocurrency. In 2017, Ripple simultaneously issued 100 billion XRP tokens and stored about 55 million of those tokens. To keep the market liquid, the locked tokens would periodically be released. Additionally, each time XRP is used in a transaction, customers must pay a modest transaction fee. To preserve the deflationary nature of its XRP token, the Ripple network also burns transaction fees.

Comparison of inflationary cryptocurrencies and deflationary cryptocurrencies

The inflationary cryptocurrencies and deflationary cryptocurrencies debate currently comes down to one secure finding. Investors may generally prefer deflationary cryptocurrencies to inflationary ones in the future. However, you can see how working on new methods for lowering inflation; inflationary cryptocurrencies can also bring about tenable advantages.

The finding implies that both inflationary cryptocurrencies and deflationary cryptocurrencies have particular benefits and disadvantages. For instance, inflationary cryptocurrencies may result in insufficient supply to meet demand. They are also necessary to provide uninterrupted mining operations at the same time. Deflationary cryptocurrencies, on the other hand, can help you benefit from a price increase, which is a significant value advantage for investors.

Supply

In the overview of inflationary vs. deflationary cryptocurrencies, the supply is the most obvious factor. An inflationary cryptocurrency has more tokens in circulation due to an increased supply. A deflationary cryptocurrency, on the other hand, delivers a less quantity of coins. The change in the collection of the native currency distinguishes deflationary cryptocurrencies from inflationary ones.

Spending Power

One of the fundamental criteria in their assessment is the purchasing power of cryptocurrencies in an inflationary and deflationary environment. The reduced purchasing power of an inflationary cryptocurrency is one of the obvious observations. A specific cryptocurrency’s value decreases once there are more of those tokens in circulation. On the other hand, the restricted supply of deflationary cryptocurrency would increase its value. The deflationary cryptocurrency’s price might rise in response to the rising demand and lower supply.

Conversion

Another crucial factor in contrasting the two varieties of cryptocurrencies is the ability to convert assets from inflationary to deflationary. Inflationary cryptocurrencies have an infinite supply since they are intrinsically inflationary. However, the inflationary vs. deflationary cryptocurrency debate must center on how inflationary cryptocurrencies might momentarily become deflationary cryptocurrencies.

In some circumstances, inflationary cryptocurrencies can impose deflationary mechanisms to combat inflation. For instance, Ethereum, which features the inflationary coin ETH, burns a particular proportion of its tokens during periods of heavy activity. Deflationary cryptocurrencies, however, cannot be artificially manufactured because they are naturally deflationary. The specific illustrations of deflationary cryptocurrencies demonstrate how they employ various processes or constraints to limit the number of tokens in circulation.

Value

The value of cryptocurrencies would also be one of the critical differences between inflationary cryptocurrencies and deflationary cryptocurrencies. What are the differences between cryptocurrencies with inflationary and deflationary values for the cryptocurrency market as a whole? The distinction between an inflationary and a deflationary cryptocurrency would demonstrate that the former would appreciate over time due to scarcity.

You might not get much right now if you consider inflationary cryptocurrencies. On the other hand, it’s crucial to remember that demand is also critical in determining how much deflationary cryptocurrencies are worth. Contrary to popular belief, a lack of demand would cause an asset’s value. However, the actual value of cryptocurrencies lies in various use cases, such as the well-known example of Ether for DeFi applications.

Last Words

Insights into the world of cryptocurrencies can be gained from the argument between inflationary cryptocurrencies and deflationary cryptocurrencies. The distinctions between cryptocurrencies that experience inflation and those that experience deflation essentially reflect the reality that a cryptocurrency’s supply influences its value and purchasing power. Due to supply and demand dynamics, even the cryptocurrency market is susceptible to inflation and deflation restrictions.

However, you should be aware of strategies for turning inflationary cryptocurrencies into deflationary cryptocurrencies by sacrificially consuming tokens or imposing supply limits. Investors interested in cryptocurrencies need to understand the differences between inflationary cryptocurrencies and deflationary cryptocurrencies. At the same time, it’s crucial to thoroughly understand each risk aspect connected to cryptocurrencies.