Inflation also affects cryptocurrencies

The inflation of bitcoin’s money supply is limited, predictable and will always decline, but the same is not necessarily true for all other cryptocurrencies.

The problem is that many people mistakenly believe that the typical characteristics of bitcoin are also found in other cryptocurrencies, when this is not the case.

Although there are other cryptocurrencies that have controlled monetary inflation, there are also many that are effectively inflationary.

What is inflation in the world of cryptocurrencies?

Before delving into the world of highly inflationary cryptocurrencies, it is necessary to clarify what we mean by ‘inflation’ in this context.

In fact, there are two different, albeit related, meanings of the term, which should not be confused, otherwise it would be impossible to understand the argument we are about to make.

Initially, the word inflation had one precise meaning in the monetary sphere. Later, however, another meaning came into force, linked to the consequences of the increase in the money supply.

In fact, inflation now refers to rising prices and is therefore used specifically to describe the loss of purchasing power of traditional national fiat currencies.

But the original meaning was not price related. Originally, inflation simply meant an increase in the money supply.

This generally leads to price increases, so the new meaning has replaced the original one, especially in relation to fiat currencies.

In the context of cryptocurrencies, however, it is still understood to mean precisely an increase in the money supply.

Therefore, high-inflation cryptocurrencies are those whose money supply increases significantly.

Bitcoin inflation

Initially, the money supply of bitcoin increased greatly. Suffice it to say that in the beginning there were no BTC, and with each new block 50 were created.

At the end of 2009, the first year without BTC, there were just over 1.5 million BTC in circulation. With more than 2.5 million being created each year, the inflation rate of the Bitcoin money supply at that time was almost 200%.

In 2012 there was the first halving, which halved the creation of new BTCs. At the end of 2012 there were about 10 million BTCs, and in 2013 just over 2 million were created. This reduced the BTC money supply inflation rate to 20 percent.

Since then there have been two further halves, so that in the course of 2023 fewer than 350,000 BTCs will be created. From around 19 million at the start of the year, the inflation rate has fallen below 2%.

By halving it, this rate will first fall below 1% and then tilt towards zero.

This monetary policy is typical of bitcoin and is shared by only a handful of other cryptocurrencies, including litecoin. Others, such as Ethereum, have different ones, so much so that already today, for example, the money supply of ETH is not really growing.

High inflation cryptocurrencies

However, there are cryptocurrencies, or tokens, that have an ever-increasing money supply. In fact, there are tokens whose money supply is increasing very rapidly.

Some of these, such as stablecoins, have a money supply that sometimes rises and sometimes falls without any effect on the market value. Others, on the other hand, have a money supply that almost always increases, and since they are not backed by collateral, they have a falling market value.

A few days ago, a chart was published showing which cryptocurrencies will have the highest inflation in September 2023.

At the top of this ranking was AVAX (Avalanche), with a money supply increase of more than $93 million in a single month. It should be noted that AVAX is capitalised at around $3.8 billion, but even so, this was an increase of more than 2% in a single month.

In fact, the market value of AVAX fell from $10 to $9 in September, a loss of around 10%.

In second place was HBAR (Hedera) with an increase in the money supply of almost $59 million. However, HBAR is only capitalised at $1.6 billion, so the monthly increase was almost 3.7%. Its market value fell from $0.056 to $0.049.

Not far behind was APE (Apecoin), with a money supply increase of almost $51 million. APE only has a capitalisation of just over $400 million, so the money supply increase was even more than 12% in a single month. Its market value fell from $1.4 to $1.1, although it has since recovered.

How the money supply increases

The increase in the money supply of these cryptocurrencies occurs simply by putting previously inactive tokens into circulation, or by creating them out of thin air and distributing them in the markets.

Sometimes this happens through airdrops, for example, where tokens are given away according to various criteria. Sometimes, however, they are sold by those who issue them in order to finance themselves.

The problem only arises when these airdrops are continuous. If they only happen once, they can at most cause a temporary loss of value, but if they continue, they tend to lose value continuously.

The fact is that when more tokens are in circulation, the supply in the market generally increases, and if demand does not increase as much, the price inevitably falls.

In the case of bitcoin, for example, the money supply continues to grow, albeit slightly, which increases the supply. But demand is increasing more and the price is rising in the long run.

For Ethereum, since the partial fee burn was introduced, the money supply has started to fall slightly, reducing supply. However, demand has not increased to the extent that the price has soared.

One must be very careful when investing in a cryptocurrency, as it is advisable to learn more about its monetary policy in order to avoid finding oneself in a situation where the market value of what one has bought falls due to a monetary policy that may already be widely known and public.