Inflationary vs. Deflationary Cryptocurrency: The Key Differences

Inflation continues to be a hot button today as it impacts the purchasing power of currencies around the world. In the process, it affects the financial decisions of both businesses and private consumers. With inflation, it requires more fiat or cryptocurrency to buy the same item today than it did previously. 

At a lower level, inflation can be healthy, such as by encouraging economic growth. However, a high rate of inflation can have devasting effects. While many people have a solid understanding of inflation as it relates to fiat and fiat-based purchases, they may not be familiar with inflationary cryptocurrencies and deflationary cryptocurrencies.

What Is an Inflationary Cryptocurrency?

An inflationary cryptocurrency is one that decreases in value over time through its tokenomics. Essentially, inflationary cryptocurrencies have an increasing or unlimited supply to keep up with or even exceed demand, and this creates downward pressure on the coin’s price.

The number of coins in circulation for an inflationary cryptocurrency rises over time, and there may not be an upper limit on how many coins can be minted in some cases. When an inflationary cryptocurrency issues more coins, investors and other users are more encouraged to participate in the platform’s activities. This places downward pressure on the price of the coins. For long-term investors, or HODLers, the pressure on the price of an inflationary cryptocurrency to generally rise over time is disadvantageous. However, volatility presents investment opportunities.

How Does an Inflationary Cryptocurrency Work?

The buying power of inflationary cryptocurrencies declines over time. This occurs because more coins are continually being minted. Based on a basic economic principle, the price of something decreases when it becomes scarcer. Because there is always a growing number of inflationary cryptocurrency coins available, however, the coin never becomes scarce. The unlimited supply means that the buying power of an inflationary cryptocurrency decreases over time.

What Is a Deflationary Cryptocurrency?

A deflationary cryptocurrency is one that has a fixed supply of coins available. When demand increases, only a limited supply of coins may still be available for release, and this leads to increased value over time.

Because these cryptocurrencies have a fixed supply, there will be a point where no additional coins can be minted to keep up with demand. As a result, those who hold deflationary cryptocurrency coins may be compensated at a higher level when selling their in-demand coins. This upward pressure on the value of deflationary cryptocurrencies could make them more advantageous for HODLers than an investment in inflationary cryptocurrencies. In addition, you can generally expect to see an increase in purchasing power with deflationary cryptocurrencies.

How Does a Deflationary Cryptocurrency Work?

Once the set supply of coins for a deflationary cryptocurrency coin has been released, no additional coins can be created. The same principle related to price and scarcity that applies to inflationary cryptocurrencies also applies here. As the demand for a deflationary cryptocurrency increases, investors and users will pay more because the supply is limited. No deflationary cryptocurrency coins are being minted to keep up with demand. Over time, you may be able to purchase more goods with a deflationary cryptocurrency than you previously could.

How to Determine Whether a Cryptocurrency Is Inflationary or Deflationary

When you research cryptocurrencies for your next investment purchase, it is essential to pay attention to the inflationary versus deflationary nature of the options available. The price of cryptocurrencies can swing wildly within a short period of time, but you may also need to assess what a specific cryptocurrency’s value may be over a longer period of time. Since a deflationary cryptocurrency has a limited token supply, the coins may be more suitable for a long-term hold. What are the factors to review in order to determine if a cryptocurrency is inflationary or deflationary?

Maximum Supply

You can easily research the tokenomics of all cryptocurrencies online. One of the key pieces of information to look for is the cryptocurrency’s maximum supply. A deflationary cryptocurrency has a hard cap on its maximum supply of tokens. This means that once that specified number of tokens has been created, no additional tokens will enter the supply from mining, minting or other methods. The maximum supply is usually clearly detailed in a cryptocurrency’s white paper.

Circulating Supply

Through your research, you will also see a specific cryptocurrency’s circulating supply. This describes the number of coins that are available at that point in time for buying or selling. These are tradable coins, so coins that are staked, burned or otherwise off the table are not considered in the circulating supply count. A platform can encourage its users to stake their coins in various ways, and this can decrease the number of coins in the circulating supply.

Total Supply

The total supply of tokens describes the total amount that has been mined or created. This includes the tokens that are in the circulating supply and tokens that are reserved or locked. However, tokens that have been lost, destroyed or burned must be subtracted to reach an accurate total supply number. A deflationary cryptocurrency can also burn some of its tokens to reduce the total supply available. An example of a deflationary cryptocurrency that did this is Ripple (XRP). On the other hand, an inflationary cryptocurrency has an unlimited or increasing supply of tokens.

Inflationary Cryptocurrency vs. Deflationary Cryptocurrency

The key differences between the inflationary and deflationary status of cryptocurrencies could impact your investment decisions as well as the long-term returns that are generated by your token purchases. To get a better understanding of inflationary vs deflationary cryptocurrency, a review of their differences and similarities is in order. Inflation describes the growth in price while deflation relates to a reduction in price. However, when you compare inflationary and deflationary cryptocurrencies, both are directly related to the token supply. A closer look at the mechanisms driving these different types of cryptocurrencies can highlight their unique traits.

Fixed vs Floating

The token supply for a deflationary cryptocurrency token is fixed. Once the total supply has been released, no additional tokens are available. This is in direct contrast to inflationary cryptocurrencies. These cryptocurrencies have a floating or unlimited supply. Because there is always a possibility of new tokens being created and the mechanisms in place to do so with an inflationary cryptocurrency, demand will never be higher than supply.

Demand and Supply

Whether a cryptocurrency is fixed or floating directly impacts supply and demand. The supply of inflationary cryptocurrency coins is said to be floating because it increases over time. By doing so, it keeps pace with demand. As a result, the token price may not be driven by the supply and demand mechanism. On the other hand, the supply of deflationary cryptocurrency tokens is steady or fixed. Demand may increase, but there are only so many tokens available to meet that demand. This causes upward pressure on the value of deflationary cryptocurrencies over time.

Conversion

It is important to note that some inflationary cryptocurrencies are designed with deflationary or limiting mechanisms to moderate the effects of inflation on token prices. For example, some cryptocurrencies have a burning mechanism, which could rein in the supply when demand is high. Others mint and destroy their tokens as needed to maintain a stable price. These are referred to as stablecoins. In addition, some cryptocurrencies charge a transaction fee. By burning this fee, they are able to continue releasing tokens from an established supply while maintaining a deflationary status to minimize inflation.

Purchasing Power

Generally, the value of inflationary cryptocurrencies decreases over time because more tokens are being released. As the value of an inflationary cryptocurrency token declines, the purchasing power of the token drops as well. Essentially, it may take more of those tokens to purchase a product a few years from now than it takes today. Deflationary cryptocurrency tokens generally will increase in value over time. Demand for a limited supply of these deflationary tokens drives the value higher. As a result, the purchasing power of these tokens tends to increase. It may take fewer of these tokens to buy a product a few years from now compared to what it takes today.

Best Inflationary Cryptocurrencies

Many of the top cryptocurrencies in use today are inflationary. Due to the extreme volatility of cryptocurrencies, shorter-term investments may make sense for some investors. In addition, some of the inflationary cryptocurrencies have mechanisms to limit the effect of inflation, and this may make them more appealing to some investors. What are some of the best inflationary cryptocurrencies available on Bybit?

Dogecoin (DOGE)

Dogecoin rose to popularity several years ago. While it quickly became well-known that it was created as a joke, investors have continued to flock to this meme coin. Soon after its debut, a large online community developed, and this community continues to be active today. Dogecoin’s popularity largely drove the token price upward initially. In fact, in August 2021, Dogecoin was recorded as the world’s seventh-largest cryptocurrency by market capitalization. As of Jan 26, 2023, its ranking has dropped to ninth place. The value of DOGE is expected to decline steadily over the course of time. 

There are currently more than 137 billion DOGE tokens in circulation today. This supply increases annually by five billion, and there is no token supply limit. Dogecoin does not have any mechanisms to rein in inflation, such as a burning mechanism. Its value has been highly volatile throughout most of its history. The current price of DOGE is $0.086 (as of Jan 26, 2023).

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Flow (FLOW)

The Flow blockchain supports digital gaming and other forms of entertainment, and it uses FLOW as its native token. The platform has been specifically designed for ease of use by users and developers, and it has a built-in structuring mechanism to make it modular for future growth. FLOW can be used in the apps tied to the platform, and the tokens can also be traded, held or staked. FLOW is used to complete network functions and is in constant demand. 

Rather than creating and distributing tokens to recruit validator node operators, Flow runs off of decentralized communities. This results in Flow's inflationary structure. However, it stands out with its unique structure to minimize, but not eliminate, inflation. Specifically, 100% of FLOW’s inflation is distributed to its stakers. This means that dilution is kept in check as long as a user is an active participant. 

The circulating supply of FLOW is 1.04 billion, and the maximum supply is 1.41 billion. The current price of FLOW is $1.13 (as of Jan 26, 2023).

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Polkadot (DOT)

Polkadot has quickly risen to prominence since it debuted in 2020. It supports the development of DApps on its network. It also serves as an exchange for transactions without the need for a middleman. Polkadot is often compared to Ethereum because of its interoperability, scalability and security. 

The circulating supply of DOT is close to 1.2 billion, and the total supply is nearly 1.28 billion. There is no maximum supply. However, Polkadot uses Parachain Auctions to minimize the effect of inflation. This is accomplished through long-term staking rewards. Because of this unique mechanism, the price of DOT is relatively stable in comparison to many other inflationary cryptocurrencies. As of Jan 26, 2023, DOT is priced at $6.41.

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Best Deflationary Cryptocurrencies

A deflationary cryptocurrency has a fixed supply of tokens. As a result, the value of the token will increase over time as demand increases. Cryptocurrency prices are highly volatile overall, so there could be wild swings in prices from day to day. However, over a longer period of time, the value may generally trend upward. This makes deflationary cryptocurrencies a reasonable, long-term investment option for some people. However, other factors impact cryptocurrency values as well, and all factors should be taken into consideration before buying any crypto coins. Here are some of the best deflationary cryptocurrencies you can consider buying on Bybit.

Ripple (XRP)

Ripple is a digital payment network that functions with its native token, XRP. Unlike many other platforms, it does not use blockchain mining. Instead, its consensus mechanism is used to confirm transactions. This mechanism operates off of several bank-owned services. It is known for its fast processing times and low transaction fees. Ripple is often considered to be an alternative to the international payment system SWIFT. 

The circulating supply of XRP is 50.8 billion, and its current price is $0.4111 (as of Jan 26, 2023). XRP has a maximum supply of 100 billion tokens, which were premined. 55 million of these tokens were locked up by Ripple and are slowly being released from their escrow status via smart contracts. A very small transaction fee is charged for each Ripple transaction, and this fee is burned. 

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Polygon (MATIC)

Polygon is a Layer 2 scaling solution that aims to support connections and networking of blockchains. By doing so, it has built an Ethereum-compatible, multi-chain blockchain ecosystem. It is comparable to Ethereum in that transaction processes use a proof of stake (PoS) mechanism. In addition, Ethereum supports the security of activities on the Polygon blockchain platform. The native Polygon token, MATIC, is primarily used for staking and paying fees. 

An important update to Polygon occurred in January 2022. At that time, the cryptocurrency introduced its new burning mechanism. This burning mechanism serves the important function of stabilizing the Polygon token supply.

The circulating supply of MATIC is close to 8.98 billion. The total supply and maximum supply of MATIC are set at 10 billion. The current price of MATIC is $0.9975 (as of Jan 26, 2023).

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Binance Coin (BNB)

Similar to Bybit, Binance is a cryptocurrency exchange that allows users to buy and trade cryptocurrencies. Its native token is BNB, and some users choose to hold BNB as an investment. BNB can be traded on other exchanges, including Bybit. In addition, BNB can be used to purchase services and goods in the real world. BNB is subject to automated burns. This maintains its total supply near a fixed number. The number of tokens burned is adjusted as needed. Further, gas fees are collected on each transaction made on Binance, which are then burned. 

The current BNB price is $305.33 (as of Jan 26, 2023). The circulating supply of BNB is almost 135 million, and the maximum supply is 200 million while the total supply is roughly 157 million.

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Bitcoin (BTC)

Bitcoin is by far the most popular and well-known cryptocurrency in use today. To date, 19 million of its total supply of 21 million coins have been released and are in circulation. Some may argue that Bitcoin is actually inflationary because while it may seem like Bitcoin is close to reaching its limit, it has built-in mechanisms such as halving to stretch this out. In fact, it is said that the limit is not expected to be reached for more than 100 years. 

However, as the amount that Bitcoin miners receive for their efforts gets smaller with each halving, the circulating supply is kept from growing too much at one time. Further, since there is a fixed supply of BTC available, there would be a limited supply once all BTC coins have been mined. This would result in the value of BTC gradually increasing over time. Hence, Bitcoin is ultimately a deflationary cryptocurrency.

As of Jan 26, 2023, the price of BTC is $23,018.27.  

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The Bottom Line

There are inherent differences between inflationary and deflationary cryptocurrencies. The differentiation is determined by the token supply. In addition to specifying a hard cap or having an unlimited supply, cryptocurrencies may use burning and other mechanisms to control supply. Because token supply directly impacts the price of cryptocurrencies over a longer period of time, this is an important factor to consider when making a purchase or investment.