What is inflation in cryptocurrency?
Bitcoin is one of the leading cryptocurrencies. Over the years, it has become a favorable choice among many investors. There might be various reasons behind the growing appreciation of Bitcoin. One of the major reasons Bitcoin has become the top choice among investors is that they are highly resistant to inflation. The term inflation plays a major role in the crypto industry. Inflation occurs when the value of a cryptocurrency keeps losing over time causing the increase of prices of consumer goods.
In the crypto industry, cryptocurrencies become inflationary when its supply is increasing over time. This happens when new crypto or tokens are introduced into the market. When the supply of these tokens increases, the value of the individual token decreases. All cryptocurrencies are subjected to inflation, and they all have different inflation rates.
In general terms, inflation refers to a similar situation of a currency losing its purchasing power in the economic system. It can affect any industry or product service. In crypto industries, inflation is an important entity that can majorly influence the whole investing process. Many cryptocurrencies are designed to resist the higher inflation rates. Bitcoin is the leading cryptocurrency with lower inflation rates making it a suitable choice for investing. A large number of investors turned to investing in cryptocurrency due to the strong mechanisms it upholds to protect against inflation.
What makes Bitcoin resistant to inflation?
Bitcoin is one of the cryptocurrencies that is designed to resist inflation rates. Cryptocurrency follows the same pattern of the market movements. If the market goes down, the cryptocurrency also goes down. Inflation rates can have a major impact on Bitcoin. The main reason behind this is when the inflation rate rises, the U.S. Federal Reserve and other major banks may tend to tighten the monetary policies to slow down the price rises. As a result of such an action, the prices of many cryptocurrencies tend to decrease drastically.
Considering the current estimates, Bitcoin is a hedge against inflation. This means that the advanced features of Bitcoin protect its investments and purchasing power from inflation rates. Its design elements and supply mechanisms make it a deflationary currency. Let us look at some of the characteristics of Bitcoin that make it resistant to inflation.
Fixed supply: Bitcoin has captured a hard-capped supply value of over 21 million coins. In simpler terms, it means that the supply of Bitcoin is fixed or limited. The limited supply prevents the entry of new coins into circulation. This eliminates the risks of inflationary rates.
Bitcoin is not tied to any currency: Bitcoin is not controlled or tied to any single entity or currency. It is a crypto asset that has international demand. This makes it less prone to economic and political risks.
Halving events: The Bitcoin project conducts a halving event every four years. This event is followed to cut the rate of the new Bitcoin token by half. This technique eventually prevents the overflow of the new token thus maintaining the supply.
Improved Purchasing power: While its demand remains intact, the rate of the new Bitcoin token decreases. This makes the individual Bitcoin possess even stronger purchasing power. This feature helps Bitcoin withstand inflationary rates.
Despite being equipped with these strong deflationary characteristics, Bitcoin might face inflation in the short term when the tokens or coins are mined. Inflationary rates may hit Bitcoin until the supply hits its maximum.
How does inflation pose an advantage for the crypto industry?
It would be quite surprising to acknowledge that inflation has a major role in stabilizing the crypto industry. When traditional investment methods and fiat currencies become highly vulnerable to inflation rates, investors will eventually turn their attention toward investing in digital currency. In such cases, cryptocurrencies like Bitcoin and Ethereum become the choice among investors. In this way, inflation might pose an advantage to the crypto industries.
Many investors have also considered investing in cryptocurrency as they believe the value of traditional currencies like the US dollar may lose its value over time due to inflation. Cryptocurrency on the other hand is equipped with strong mechanisms that protect it from being vulnerable to inflation. Another important factor that attracts investors is that the government cannot regulate cryptocurrencies like Bitcoin and Ethereum. This protects the crypto asset from any future regulatory risks and laws. Bitcoin being operated on a decentralized platform, makes it free from the governance of a single body.
Conclusion
Inflation is a term that has been common in the economic industry much before cryptocurrency or the idea of digital currency came into existence. Even though it helps to stabilize the industry in a way, higher inflationary rates can still impact the crypto assets. There are many cryptocurrencies like Bitcoin and Ethereum that stay resistant to inflation. But still, many cryptocurrencies do not possess the strength to resist inflation. So investors need to consider all these crucial factors before beginning their investing experience.