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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.
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.