Inflationary Versus Deflationary Cryptocurrencies: Know The Difference
Don’t get tricked by deflationary or inflationary cryptocurrencies! Understanding inflation versus deflation is very important, especially when it comes to cryptocurrency.
Author:James PierceReviewer:Camilo WoodAug 08, 202228 Shares1.1K Views
Don’t get tricked by deflationary or inflationary cryptocurrencies! Understanding inflation versus deflation is very important, especially when it comes to cryptocurrency. Some people don’t understand the difference, and this results in them placing themselves in potentially sticky situations without being aware of the risk involved.
Learn more about inflation versus deflation to protect your portfolio and know what type of cryptocurrency you are investing in.
What is Inflation Versus Deflation and Why It Matters
Inflation and deflationhave everything to do with the supply of the asset, or in this case, the supply of the crypto. Understanding how the supply works will give investors and traders a better understanding of the risks that could happen when investing in that particular cryptocurrency.
Suppose you’re planning to hold certain crypto for the long run. In that case, it is important to understand whether it is inflationary or deflationary in order to conclude if it is a good addition to your portfolio. Generally, one is sometimes riskier than the other and knowing this will help you assess whether the potential reward is worth the innate risk you are taking.
Investors that don’t know the difference might be affected by supply impacts that will leave them clueless as to why their investment either shot up or went down. Since cryptocurrencies are still considered assets, it is very important to understand how their supply works in order to understand what the cryptocurrency is capable of doing.
“Knowledge is power.” This is something that a lot of expert traders remind their mentors of. It is very important to understand the properties of the asset or crypto you are investing in to protect yourself from additional risk.
What is an Inflationary Cryptocurrency?
Inflationary cryptocurrencies mean the developers or heads of the cryptocurrency are free to print out as much of the currency as they seem fit. Like with fiat money, in the event of the government needing more cash, they are free to print more of it.
This can be extremely risky for some cryptocurrencies since this means that the project is free to print out new coins or tokens at their discretion. The more tokens or coins that are in supply, the bigger the chance that their price would be impacted and even go down.
Examples of inflationary cryptocurrencies include Dogecoin. This means new coins can be mined (created) at any point, which could result in their price being affected.
Since DOGE’s supply has no upper limit, it can print out as many cryptocurrencies as possible, and the more Dogecoin there is in circulation, the lower the value of each coin becomes. There are also many other cryptocurrencies that are considered inflationary, like Tether, which brought a lot of heat for minting new USDT without allegedly having the funds to back it.
What is a Deflationary Cryptocurrency?
Deflationary cryptocurrencies have a finite limit, meaning no more crypto can be minted after that limit is reached. An example of deflationary cryptocurrencies includes Bitcoin, which limits the total supply of BTC that circulates.
However, the thing about Bitcoin is that it can still be mined, which technically means it is not fully deflationary yet. Like how its creator Satoshi Nakamoto designed it, once all the Bitcoins in the world have been mined, the asset will become truly deflationary since its supply is finite.
Deflationary cryptos could be considered a better store of value and a potentially less volatile investment since its price can only be impacted when it is either sold or bought. Unlike inflationary cryptocurrencies, the prices of inflationary currencies cannot be impacted by additional supply being minted out.
Although a little is less risky, cryptocurrencies, in general, are still categorised as high-risk assets. This means that it is still extremely volatile and might not play by the rules that conventional markets play when it comes to valuation and profit.
Why It’s Important to Choose a Broker
Although it’s possible to make a lot of money on random cryptocurrency, you absolutely have to follow three things: entering at the right time, being lucky with your choice, and exiting at the right time (finding a buyer at the right price). These three things are hard to possess, so most expert traders recommend sticking to both the technicals and fundamentals when choosing crypto.
Other cryptocurrencies, however, have a decent amount of volatility to make a profit without the extra risk of something extremely wild happening to it. The job of reputable brokerages is to make sure the assets or cryptos offered on their platform are legitimate and don’t place the trader at unwanted risk.
Finding brokerages that do the vetting process properly can be hard due to the number of trading platforms. The official website of Immediate Edgelooks somewhat like an averagely good place to start. This is because their partner brokers offer beyond trading services. Users can also get to learn the fundamentals of trading. While you may not get proper education on whether a crypto is inflationary or deflationary, the trading platforms may help you understand risk management.
While there are a lot of trading services that claim to offer the “lowest fees” or the “highest rewards,” the real value comes in the vetting process of each asset that makes it to its platform. Due to its volatility, the broker has to carefully select the right cryptocurrencies for users to trade or invest in.
Should You Choose Inflationary or Deflationary Assets?
Deflationary assets, by concept, are better to hold long term, but since we’re talking about crypto, they should still be considered high risk. Inflationary assets, however, can be traded, and due to their volatility, traders might be able to make more profit between their highs and lows.
Before picking out an inflationary or deflationary asset, it is important to clarify whether you are investing in it or plan to simply trade it. If you plan to trade, either asset will work since the only thing that matters is the price of the cryptos.
Unlike Federal Reserves, cryptocurrencies are decentralised, meaning they abide by different rules when it comes to deciding how much of a crypto should be minted. Although this has its benefits, it also comes with a few disadvantages.
The disadvantages of not knowing how much cryptocurrency can be printed out can be seen in how LUNA 2.0was handled. After dropping a massive amount shortly after its launch, Terra decided it wanted to mint a billion new tokens.
These tokens are extremely risky with unpredictable volatility and are recommended to be traded only by professionals. For those starting out in cryptocurrency and who want to rely on skill instead of luck, it is better to trade cryptocurrencies that have gone through the needle and proven themselves a little more profitable and safe.
Conclusion
Although it is true that a lot of people have gotten rich in trading or investing in cryptocurrency, it should also be noted that some people have lost a fortune by not investing properly. Due to this, it is recommended that you consult a financial advisor before placing any money in cryptocurrency trading or investing to ensure that if a worst-case scenario happens, the impact won’t cripply your finances.
James Pierce
Author
Camilo Wood
Reviewer
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