Is Deflation Good For Crypto?

As the total supply decreases, the intrinsic value of the currency increases. In turn, its purchasing power goes up significantly. That makes deflationary cryptos good options for long-term investing.

Many cryptos fluctuate between deflationary and inflationary over time. For instance, in December 2022, Ethereum once more became a deflationary crypto.

But, what is a deflationary crypto and how does crypto become deflationary?

Understanding inflation/deflation for cryptos needs knowing the difference that exists between the intrinsic value of a currency and market value.

Deflationary Cryptocurrencies

The first thing you should note is that most of the cryptos are somehow exposed to inflation, except flatcoins, such as Nuon. Although cryptos can be designed to hedge against inflation, the higher the circulating supply, the more it is possibly going to be impacted by inflation rates. In case an asset’s supply number surges out of hand, its buying power will drop considerably.

Bitcoin is the ultimate example of a deflationary cryptocurrency. From the moment Bitcoin was developed and launched in 2009, a hard limit of 21 million BTC was set available for mining. No more BTC will ever exist.

As of late 2022, less than 2 million BTC are left for mining. Mining difficulty has surged considerably, and as a result, every new BTC is becoming increasingly expensive, which makes Bitcoin deflationary. With. a decrease in the general supply, the intrinsic value of the currency increases, and its buying power rises considerably. That makes deflationary cryptos great choices for long-term investing.

Just because Bitcoin has an increasing intrinsic value does not mean that its market value will not drop. There have been multiple crypto market crashes over the years. But during these crashes, BTC retained total value better than non-value, inflationary cryptos.

Many factors contribute to BTC’s deflationary status. The main factor is that a huge portion of the total BTC supply has been lost over time (nearly 20%, as highlighted in some estimates.