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Author: Admin | 2025-04-27
Moderate inflation rates are to be expected. Economic growth is characterized by increased spending on goods and services by consumers and businesses, and demand that exceeds supply. As demand surpasses supply, producers raise prices, driving inflation. In this context, inflation can be considered a good thing.However, any rise or fall in prices that happens too much, too quickly is generally not a good sign. A rapid increase in prices drives consumers to anticipate further increases down the road. Consumers may then resort to hoarding or purchasing more goods and services now in anticipation of higher prices in the future. This behavior drives demand further up, consequently pushing producers to raise prices. This phenomenon is typically referred to as “hyperinflation” or “runaway inflation.”Deflation, on the other hand, is characterized by a consistent fall in prices. When this happens, consumers hold off their purchases in anticipation of lower prices down the road. As demand continues to spiral downwards, producers also keep lowering prices to attract buyers.For these reasons, moderate inflation is generally good for the economy as it encourages spending and bolsters economic growth. Bitcoin and inflationWhile the economics around the Bitcoin market is complex, some cryptocurrencies, including Bitcoin, are designed to resist inflation or experience predictable and low inflation rates. And while Bitcoin is generally heralded as a hedge against inflation, recent economic developments have seen Bitcoin performing less as a pure hedge. What role does Bitcoin play in inflation?Largely driven by institutional investments, the cryptocurrency has become increasingly aligned with general market movements. This means that when the market goes down, Bitcoin likely goes down as well.Consequently, when news of inflation strikes, the Federal Reserve will likely enact a dual mandate. Policy interest rates will go up, and there will be monetary tightening. As a result, assets (including crypto like Bitcoin) will see a price decline. Do cryptocurrencies experience inflation?Yes, cryptocurrencies experience inflation — even Bitcoin, which is often seen as “inflation-resistant.” Much like gold, Bitcoin experiences inflation as more of it is mined. However, given that mining for new Bitcoin is automatically reduced by 50% every four years, inflation rates are also bound to decrease eventually.As long as Bitcoin’s value continues to rise against fiat currencies, Bitcoin’s typical annual inflation rates aren’t usually a major area of concern for investors. Other cryptocurrencies, however, may perform differently. Stablecoins, for example, are pegged to fiat money and can be considered a low-volatility cryptocurrency for saving money. However, stablecoins are also subject to inflation and could lose value over time. As their reserved currency loses value, so do the stablecoins. Is Bitcoin deflationary or inflationary?Bitcoin is technically an inflationary currency. This is because it was designed to mimic the stable inflation rate of gold. While the common definition of deflation may connote that Bitcoin is deflationary because its purchasing power increases over time, deflation refers to a decrease in the money supply (or substitutes thereof).To be clear, deflation is not just a decrease in prices, although it is colloquially defined as such.
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