One thing that irks me is how many people view cryptocurrency as deflationary. Sure, in the longterm they are, but how many coins will last that long? With over 100 coins out there now, many of them having block rewards for several decades, it is unlikely that any of them will ever reach the point where they are actually deflationary. Hell, it’s questionable if Bitcoin will be around that long. So for all intents and purposes, the majority of cryptocurrencies are inflationary.
The inflation of most coins can be modeled fairly simply. Let’s take bitcoin for example, and look at the total number of coins at the end of each year.
Year 1: 2628000 (baseline)
Year 2: 5256000 (100% increase)
Year 3: 7884000 (50% increase)
Year 4: 10500000 (33% increase)
Year 5: 11814000 (12% increase)
Many altcoins follow a smiliar model. All these coins being generated puts significant downward pressure on the market. Bitcoin has managed to do fine with all the exposure it’s getting, but many altcoins will get hit hard by this. What does this mean? For a coin that’s been for say, 2 months, over the next 2 months that coin will experience downward pressure equal to it’s current market cap. Since interest in altcoins tends to be frontloaded, the effects of this supply increase will eclipse monetary inflow, and price goes down.
This, of course, makes most altcoins an awful investment. They are unable to generate the interest necessary to keep the price stable, let alone increase. It is, among other reasons, why we must be very selective when choosing what to invest in. Newbies will often rush to be the first one to own a new coin, when this can be easily shown to be an overall losing plan. While this strategy used to work in the past, when there weren’t as many coins out there, it no longer does anymore. The game has changed.
Lately I’ve been big on bashing bad coins, maybe the next article will be on a coin I consider to be good.. Let me know what you guys want.
While it was great when Friedman showed that inflation is a monetary issue, and is caused by an increase in the money supply, it is not the same thing as an increase in the money supply. This misuse of the term by many coiners is still bad just as the misunderstanding of the cause used to be. Inflation is the result of the growth of the money supply outstripping the growth of economic production. In other words, you can have a growth in the money supply with zero inflation. They are not equal. Your chart assumes zero growth in the bitcoin economy, when you show the supposed inflation rates. Given the changes of the price of bitcoin compared to other units of value, this is clearly not correct. Most of the models for inflation and the macro economic effects of it also are developed for a model with a currency lock in. As of right now, bitcoin and family are probably better modeled as a good, with supply and demand curves that affect the price rather then a currency tied to a regions economy.
So, while it is true that most coins are overproduced relative to the growth in demand for the coin, to talk about it in terms of inflation or deflation is erroneous.
Pardon, poor choice of words of my part. Fixed.