Inflationary vs Deflationary cryptocurrency: What’s the Difference?

If you’ve been in the crypto space for some time, Chances are you’ve heard of inflationary and deflationary cryptocurrencies before. But do you know what they mean and the difference between the two categories of cryptocurrencies?

These are the two mechanisms for creating coins and distributing them. In this guide, we explain what they are, and give the differences between the two to help you understand the implication of using them as investments.

Inflationary Cryptocurrencies 

Inflationary cryptocurrencies have a supply that increase over time. This means there will always be more coins or tokens entering the market, usually at a fixed rate. There is a percentage increase in the supply of the asset after a fixed period.

The asset may have a maximum supply or not. In the case of the former, the number of coins or tokens entering the market stops when the cap is reached. In the case of the latter, there is no limit to how many coins or tokens continue to enter the market.

Some may start with a maximum supply but later remove the cap on the supply, making it have unlimited supply. Dogecoin comes to mind here. While it started with a maximum supply of 100 billion coins, it later removed the cap, making it have unlimited supply now.

Deflationary Cryptocurrencies

These are cryptocurencies whose supply reduces over time. Like inflationary cryptocurrencies, they have a fixed rate at which the coins are released into circulation, thus causing steady deflation over time. These usually have a maximum supply that cannot be exceeded.

Bitcoin for instance is a deflationary asset with a maximum supply of 21 million coins. Once this number of coins are mined, there can be no more Bitcoins entering the market. Bitcoin’s rate of supply is cut by half every four years.

For example if the current block reward – how many Bitcoins you’re paid for validating a block – is 5 BTC, it becomes 2.5 BTC after four years. This makes Bitcoin to grow scarcer by design. The supply cap can also be removed though, like in the case of Dogecoin.

What Is the Difference Between the Two

There are key differences between inflationary and deflationary cryptocurrencies. The first and most obvious one is that one is that inflationary while the other is deflationary. The inflationary one has a fixed rate at which the supply increases while the deflationary one has a fixed rate at which supply decreases.

The second difference is in their usage. Inflationary cryptocurrencies are suitable for everyday spending such as paying for goods and services online, while deflationary are more suitable as stores of value. This is clearly seen in Dogecoin which is accepted by merchants in thousands of stores worldwide.

While some merchants also accept Bitcoin, its slow transaction speed and cost makes it not so popular for the purpose of buying and selling.

Inflationary tokens seem to discourage hoarding as the price isn’t likely to increase significantly at anytime and it’s easy to spend. Deflationary crypto on the other hand encourage hoarding because of the cost of transaction and also the speed.

Another difference is that inflationary cryptocurrencies have a flexible and adjustable monetary policy. This means its supply can be adjusted at any time using burn programs where some of the tokens or coins are burnt, i.e. removed from circulation to reduce the supply and increase value.

The supply may also be increased by increasing the number of tokens released into circulation.

Deflationary cryptocurrencies on the other hand continue to decrease over time and see greater adoption as the supply decreases.

Which Should You Use?

This depends on What you wish to use the cryptocurrency for. If your goal is to use it for online transactions, an inflationary crypto asset will be perfect, such as Dogecoin. If on the other hand you’re looking for an asset you can hold as a long term investment, Deflationary assets like Bitcoin are the best.