Inflation

Defining Inflation

Inflation is a concept commonly associated with traditional finance. In simplistic terms, it refers to the decrease in purchasing power of a particular currency over time, leading to a general increase in prices for goods and services. Think of it as needing more of the same currency to buy the same goods or services that could be purchased for less in the past.

Inflation and Traditional Currencies

In traditional economies, Central Banks control inflation rates. It's often a delicate balancing act - too much inflation can mean prices spiral out of control (known as hyperinflation). Too little can result in deflation, where prices fall and economic activity can slow down.

Inflation’s Entrance into the Crypto World

So how does inflation relate to the world of cryptocurrency and blockchain? Unlike traditional currencies, most cryptocurrencies like Bitcoin have a set supply. This finite nature theoretically hampers inflation because the supply does not increase indefinitely. However, cryptocurrencies which don’t set a cap on supply, such as Ethereum, can really experience inflation.

Inflation in the Blockchain Space

In the blockchain industry, the term "monetary inflation" refers to the release of new tokens into circulation. It differs from typical price inflation, because while the latter can diminish a currency's buying power, monetary inflation does not necessarily devalue a cryptocurrency — it may merely increase its supply.

Understanding the Effects of Inflation

Understanding how inflation works in the realm of cryptocurrency and blockchain is a key component to wise investing. Being aware of the supply rules of your chosen cryptocurrency can give you invaluable insights on its potential future value.