Cryptocurrency inflation

The money supply of bitcoin is restricted, predictable, and will eventually decrease, but this isn’t always the case for other cryptocurrencies.

The issue arises from the widespread misconception that other cryptocurrencies share the same features as bitcoin, which is untrue.

Many cryptocurrencies are in fact inflationary, even though there are some that have managed to contain monetary inflation.

In the realm of cryptocurrencies, what is inflation?

It is important to define what we mean by “inflation” in this context before diving into the world of extremely inflationary cryptocurrencies.

It is important to distinguish between the two distinct, yet connected, definitions of the phrase; failure to do so would make it difficult to comprehend the point of contention we are going to make.

In the field of money, the term “inflation” formerly had a single, clear definition. But later on, a different interpretation emerged that was connected to the effects of the money supply expansion.

Actually, the term “inflation” is now particularly used to denote the loss of purchasing power of traditional national fiat currencies, as it now also refers to rising prices.

However, the original meaning had nothing to do with cost. At first, inflation was just a rise in the amount of money in circulation.

The old meaning has been superseded by the new one, particularly with regard to fiat currencies, as a result of the usual price rises that follow.

Nonetheless, it is still precisely understood to signify an increase in the money supply in the context of cryptocurrencies.

Consequently, cryptocurrencies with a large growth in money supply are said to have high-inflation.

Inflation of bitcoin

At first, there was a significant growth in the bitcoin money supply. To sum up, there were no Bitcoins at first, and 50 were created for every new block.

In the first year without Bitcoin, 2009, there were little over 1.5 million in circulation at the end of the year. At that time, the annual inflation rate of the Bitcoin money supply was close to 200%, with over 2.5 million being minted annually.

First halving occurred in 2012, halving the amount of new Bitcoins created. There were over 10 million Bitcoins at the end of 2012, and slightly more than 2 million were minted in 2013. As a result, the inflation rate of the Bitcoin money supply dropped to 20%.

Since then, there have been two more half, resulting in the creation of less than 350,000 BTC by the end of 2023. The rate of inflation has decreased to less than 2% from almost 19 million at the beginning of the year.

This rate will decrease to less than 1% and then begin to tilt towards zero when it is halved.

Just a few other cryptocurrencies, such as litecoin, follow the same monetary policies as bitcoin. Others, like Ethereum, have distinct ones; in fact, as of right now, the money supply of ETH is not increasing at all.

High rate of cryptocurrency inflation

On the other hand, some cryptocurrencies, or tokens, have a money supply that is constantly growing. As a matter of fact, the money supply of some tokens is growing extremely quickly.

Stablecoins, for example, have a money supply that fluctuates in and out of the market without affecting its value. Conversely, some have a money supply that is nearly always growing and, since they lack collateral, their market worth is declining.

A chart indicating which cryptocurrency would have the biggest inflation in September 2023 was released a few days ago.

AVAX (Avalanche), which increased its money supply by more than $93 million in a single month, topped this ranking. Even though AVAX has a market capitalization of about $3.8 billion, this was nevertheless a rise of more than 2% in a single month.

In actuality, AVAX’s market value dropped by almost 10% in September, from $10 to $9.

With an almost $59 million rise in the money supply, HBAR (Hedera) came in second. Since HBAR only has a $1.6 billion market capitalization, the monthly increase was about 3.7%. It dropped from $0.056 to $0.049 in market value.

APE (Apecoin) followed closely, seeing an almost $51 million boost in money supply. With a capitalization of little over $400 million, APE had a month-over-month rise in the money supply of over 12%. Although it has since rebounded, its market value dropped from $1.4 to $1.1.

How the quantity of money expands

By merely redistributing tokens that were previously out of circulation or by producing them out of thin air and selling them in the markets, the money supply of these cryptocurrencies is increased.

This can occasionally occur through airdrops, for instance, in which tokens are distributed based on a number of variables. However, in order to raise money for themselves, the people who issue them occasionally sell them.

It’s only when these airdrops are ongoing that something goes wrong. They can, at most, result in a brief loss of value if they occur only once, but if they do so often, their worth tends to decline.

The market’s supply actually rises as there are more tokens in circulation; hence, if demand does not rise as much, the price will eventually decline.

For instance, the money supply is growing somewhat in the case of bitcoin, increasing the supply. On the other hand, as demand grows, prices will eventually rise.

With the implementation of the partial fee burn, Ethereum’s money supply has begun to gradually decline, lowering supply. But there hasn’t been a significant increase in demand to drive up prices.

When purchasing a cryptocurrency, one should exercise extreme caution and educate themselves about its monetary policy to prevent being caught in a situation where the market value of their purchase declines as a result of a monetary policy that may already be well-known and open to the public.