In this guide, we will take a closer look at what inflation means in the crypto context and share the key details you need to know about it.
What Is Inflation?
Inflation in the crypto industry refers to the increase in the supply of a particular cryptocurrency over time. The supply growth results in a decrease in the value of each individual token or coin. Consequently, if all other factors remain unchanged, purchasing a specific item would require a greater number of tokens.
What You Need To Know About Inflation
As you know, the inflation definition is applicable not only in the crypto industry but also in traditional markets. However, one of the key differences between fiat currencies and crypto assets is that the latter operate on a decentralized system.
The rate of inflation in traditional currencies is typically impacted by such factors as:
- Government spending
- Interest rate adjustment
- Money supply manipulation
Many of these processes are influenced or controlled by central banks.
In contrast, the supply, distribution, and inflation rates in the crypto space are not governed by a central authority. What’s more, the monetary policies of different cryptocurrencies vary, often leading to significant distinctions in the pace of inflation between them.
For instance, stablecoins aim to support their value by tying it to fiat money. As a result, they are directly impacted by the monetary inflation of the traditional currency to which they are pegged.
An example of a different inflation rate policy can be seen in Bitcoin’s case. BTC has a fixed supply cap of 21 million tokens, and the rate of its inflation is programmed to decrease over time.
Initially, Bitcoin’s inflation rate was around 50 tokens per block. However, it has gradually declined and is currently around 1.8 tokens per block. This drop is a result of halving events, which occur roughly every four years and reduce the number of tokens released through mining.
This policy is designed to mimic the scarcity of precious metals and is implemented as a means of maintaining BTC’s value in the long term.
