It is not enough to earn and save money in today's world. You also have to protect its value from decreasing. Fiat currencies have made this task increasingly difficult due to inflation.
The recent data shows the US consumer price index reaching a 40-year record high of 9,1%, forcing the Fed to continue tightening its policy. As for Europe, the analysts expect the indicator to go up to 8,6%.
Such high rates directly impact the everyday life of any person. Take the purchasing power of the US national currency, for instance. In 1971 one dollar would have bought you 17 oranges, while in 2020, it would barely be enough to buy a coffee at McDonald's. In this regard, storing fiat currencies means losing money over time. Even bank deposits cannot compensate for the growing inflation.
Luckily, some assets, such as gold and crypto, can protect investors long-term. This article explores the benefits of digital assets in terms of inflation and the difference between inflationary, deflationary, and hybrid systems.
Understanding the Basics of Inflation
Inflation can be described as a decrease in the purchasing power of money. In reality, it translates to an increase in the price of goods and services.
For example, a US citizen's total income and savings are currently worth 9,1% less than one year ago.
There are several reasons for rising rates.
Increased Money Supply
When a central bank starts printing more money to support the economy, the value of a national currency lowers.
Cost-Push Inflation
When prices of essential commodities, such as oil and food, spike due to the increased cost of production and logistics, it can trigger inflation. Such a scenario usually occurs in natural disasters and tense macroeconomic situations.
Demand-Pull Inflation
If demand for certain goods grows and outpaces a supply, sellers raise prices. As a result, it can lead to higher inflation.
Nevertheless, it is not necessarily a bad thing. Many experts consider inflation an essential part of any economy. People use credits, spend more money, and stimulate economic growth when it's at low or moderate levels. However, if rates are too high, it can seriously damage the welfare of an average citizen.
How Cryptocurrencies Control Inflation
As the macroeconomic situation tightens globally, investors seek fiat assets alternatives to reduce the impact of inflation. Crypto has become one of such tools due to its deflationary nature.
Let's examine the emission models of top digital assets.
Bitcoin's Limited Supply
Some investors turn to Bitcoin when it comes to hedging inflation. It has a fixed supply of 21 million BTC. In simple terms, no one can mine more Bitcoin as its supply mechanism is hard-coded in the protocol. Analysts expect the last Bitcoin ever to be mined in 2140.
Although Bitcoin has a fixed supply, it is still subject to inflation as new coins are mined regularly. The rewards for miners are reduced by half every 210,000 blocks. Currently, Bitcoin's inflation rate is at 1,67%.
Source: charts.woobull.com
Ethereum's Unlimited Supply
Ethereum is not a deflationary asset since it has an unlimited supply. It means that technically an infinite amount of ETH can be issued.
Nevertheless, the inflation rate of Ethereum is relatively low: according to May's 2022 data, it decreased from 1,1% to 0,51%.
The network controls the rate via a token-burning mechanism. A certain number of ETH coins are removed from circulation regularly after London hardfork.
If network activity is high enough, Ethereum can even become deflationary from time to time.
IntoTheBlock analyst Lucas Outumuro stated that the ETH net issuance would range between -0.5% and -4.5% depending on network fees, providing long-term benefits for coin holders.
Solana's Inflation Schedule
Solana also has an unlimited supply. However, the project utilizes a so-called "inflation schedule" to issue new coins.
- Initial Inflation Rate — 8%. It is Solana's starting Inflation rate that can only decrease over time.
- Dis-inflation Rate — 15%. It is the rate at which the SOL Inflation will reduce.
- Long-term Inflation Rate — 1,5%. It is the stable inflation rate that the project expects.
There are 345,607,986 SOL in circulation, while the total supply is 511,616,946 SOL. That's because Solana has its burning mechanism too.
EOS' Adjustable Inflation Rate
The EOS cryptocurrency uses inflation to fund the Block Producers who confirm transactions and maintain the blockchain. Right after the launch, the inflation rate was at 5%: 4% went to a savings account, and the remaining 1% went for BP rewards.
In 2020, the community voted to remove the 4% inflation and burn the tokens, reducing the circulation supply by 34 million EOS tokens or $132 million.
However, in 2021 the system was changed again to respond to the market conditions: the inflation was set to 3%. 1% is for Block Producers rewards, while the rest 2% is for the savings account.
Inflationary, Deflationary or Hybrid: What Is Better
Although crypto is often considered deflationary, not all digital assets have a fixed supply. Most top coins by market cap, including Ethereum, Solana, and EOS, have unlimited supply but maintain low and stable inflation rates due to burning mechanisms.
Critics often argue that the high volatility prevents crypto from becoming a hedge against inflation. All types of investing come with risks, but diversification is a way to make a portfolio more stable.
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