The Difference Between Bitcoin and Other Cryptocurrencies
Many people mistakenly assume that all cryptocurrencies share the same characteristics as bitcoin, but this is not true. While bitcoin has limited and predictable inflation, other cryptocurrencies may have different monetary policies that result in higher levels of inflation.
Understanding Inflation in Cryptocurrencies
Before discussing highly inflationary cryptocurrencies, it’s important to clarify what we mean by “inflation” in this context. Inflation traditionally referred to an increase in the money supply, but it now commonly refers to rising prices and the loss of purchasing power of fiat currencies. However, in the world of cryptocurrencies, inflation still refers to an increase in the money supply.
The Inflation of Bitcoin
Bitcoin’s money supply initially increased significantly, with 50 new bitcoins created with each new block. However, through halving events, the creation of new bitcoins was reduced. By 2023, the inflation rate will be below 2%, and it will continue to decline until it approaches zero. This monetary policy is unique to bitcoin and a few other cryptocurrencies.
Cryptocurrencies with High Inflation
There are cryptocurrencies or tokens that have an ever-increasing money supply. Some stablecoins have fluctuating money supplies without affecting their market value. Others have continuously increasing supplies, leading to a falling market value since they lack collateral. A recent chart revealed the highest inflation rates among cryptocurrencies for September 2023.
Examples of Highly Inflationary Cryptocurrencies
The chart showed AVAX (Avalanche) with a more than $93 million increase in its money supply in a month, resulting in a market value loss of around 10%. HBAR (Hedera) had a nearly $59 million increase, causing its market value to fall from $0.056 to $0.049. APE (Apecoin) experienced a more than $51 million increase, resulting in a market value drop from $1.4 to $1.1.
How Money Supply Increases
These cryptocurrencies increase their money supply by putting inactive tokens into circulation or creating new tokens out of thin air. Airdrops and token sales are common methods for increasing supply. Continuous airdrops can lead to a continuous loss of value if demand does not keep up with the increased supply.
Investing in Cryptocurrencies
When investing in cryptocurrencies, it’s crucial to understand the monetary policies of each cryptocurrency to avoid potential losses due to high inflation. By researching and learning about a cryptocurrency’s monetary policy, you can make informed investment decisions.
Hot Take: Consider Monetary Policies When Investing in Cryptocurrencies
When choosing which cryptocurrencies to invest in, it’s important to consider their monetary policies. Bitcoin and some other cryptocurrencies have limited and predictable inflation, while others have high and increasing inflation rates. Understanding these policies can help you make better investment decisions and avoid potential losses due to inflationary pressures.
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