Impact on the Crypto Industry – Cryptopolitan

Inflation is a critical factor that can affect the crypto industry as it directly affects the value of various currencies. Inflation is a sustained increase in the price level of goods and services. Inflation occurs when there is an increase in the supply of money and credit in relation to the number of goods and services available for purchase.

Inflation causes prices to rise as people have more purchasing power. As a result, goods and services become more expensive over time because there is less value for each unit of currency.

The crypto industry and inflation

The digital resource landscape is constantly developing. For example, in the crypto industry, inflation refers to the continuous introduction of new coins into circulation.

For example, Bitcoin’s aggressive deflation protocol proposes a cap of 21 million coins and a gradual decrease in the total minting of new coins with each halving event. In 2021, the circulating supply was 18.7 million, but with a current inflation rate of 1.8%, which will decrease with each halving event; analysts estimate the next to be in May 2024. This schedule ensures that new bitcoins become increasingly scarce, and their purchasing power increases as demand remains high, but supply levels drop even more.

Ethereum’s inflation rate shifts with recent changes to the network. Before the merger, inflation was 4.6%. Players are now rewarded differently, and new network usage will push annual inflation below 0.5%. If network activity picks up, it may turn negative.

As the digital asset space grows, it remains a small and volatile fragment of the overall economy. Moreover, with an estimated total market capitalization of around $1 trillion, changes in the supply of cryptocurrencies can have a smaller impact than macro changes, such as a shift in monetary inflation, political decisions and large movements in the consumer price index.

Some people still associate crypto price cycles with Bitcoin halving cycles, recent institutionalization of the crypto market has made political correlations increasingly important. The implication is that more significant economic trends outside of cryptocurrency are likely to have more influence over prices than anything directly related to crypto.

Crypto and the Consumer Price Index (CPI)

The consumer price index (CPI) is the average change in the prices of a fixed basket of household goods and services. The CPI is an essential metric for determining the level of inflation in an economy, as it tracks the changes in the cost of living from one year to the next.

It is also important to note that when analyzing inflation’s effect on crypto, we must consider the global economy. Global inflation is an all too familiar situation in today’s economy, and it can be difficult for people to manage their finances when prices suddenly rise.

When that happens, necessities like food and energy bills take precedence over activities like investing in cryptocurrencies. In this scenario, people tend to save up as much disposable income and assets as possible, so it’s no surprise that digital assets are the first on the chopping block when faced with rising costs. When faced with price increases, Bitcoin and other digital currencies tend to be prioritized lower than essential survival items.

Crypto and monetary inflation

Monetary inflation is an increase in the total amount of money circulating in an economy. Central banks cause it by issuing a new currency or commercial banks providing credit.

As central banks issue more and more of the world’s fiat currencies each year, the value of individual units of currency declines and the CPI rises.

A change in current money growth can drastically affect the value of crypto, often resulting in significant gains when the money supply grows, but struggles when it shrinks. Understanding the velocity can help predict changes in crypto values, which can be useful information for investors looking for a lucrative investment return.

Inflationary cryptocurrencies

In addition to Bitcoin and Ethereum Classic, many other cryptocurrencies have built-in inflation rates designed to reward holders. By increasing the number of tokens in circulation, these projects aim to reward users for holding their coins, often leading to an increase in demand for the cryptocurrency.

These inflation models also dictate how much each user will receive as a reward when staking their coins.

Examples:

• Dogecoin has an unlimited supply meaning that the value of each coin can decrease over time if the supply increases faster than the demand.
• Bitcoin is inflationary, but also has disinflation-promoting measures that further slow down the inflation rate, called “halving”. The halving happens every four years and reduces the number of coins awarded to miners.

Deflationary cryptocurrencies

These digital tokens have a limited supply, meaning users can only get them by buying from current holders or mining rewards. This scarcity can cause the value of these currencies to increase over time as demand exceeds supply.

Examples:

• Chainlink (LINK) has a fixed and known total supply of 1 billion LINK tokens.
• Binance Coin (BNB) has burning mechanisms to bring the supply down to 100 million tokens.
• Ethereum (ETH) became deflationary after the merger.

The effect of inflation on crypto markets

The effect of inflation on crypto markets occurs in two ways: First, it affects the prices of cryptocurrencies and how investors perceive and react to real-world events. When inflation increases, investors tend to move their money away from the traditional financial markets, such as stocks and bonds, into alternative investments such as cryptocurrencies. They prefer crypto because they perceive crypto as more stable than conventional assets in times of economic uncertainty or inflationary pressure.

Inflation can also lead to increased volatility in the crypto markets, as investors react when prices become volatile. In addition, it can be exacerbated by market speculation or manipulation, which quickly sends prices in either direction.

9 tips for investing in tough economic times

Here are nine (9) investment tips that will come in handy in tough economic times:

1. Diversify your portfolio: Don’t put all your eggs in one basket – spread your investments across different types of crypto and traditional assets to protect against market volatility.

2. Research before investing: Research the cryptocurrency you are investing in and make sure it aligns with your investment goals.

3. Understanding risk tolerance: Be aware of how much risk you are willing to take when investing in cryptocurrencies, and don’t invest more than you can afford to lose.

4. Use Stop Loss Orders: Establish stop loss orders that automatically close trades when prices reach a certain point to limit losses if the market takes an unexpected turn.

5. Consider long-term investments: Don’t expect to get rich quick – investing in cryptocurrencies can be volatile, so it’s important to take a long-term perspective when considering them as part of your portfolio.

6. Use technical analysis: Understand and apply basic technical analysis concepts when making investment decisions to help you identify market trends.

7. Stay up to date on crypto news: Be aware of the latest news and developments in cryptocurrency to help you make informed investment decisions.

8. Don’t rush the market: Do not try to time the market by trying to buy or sell just as prices are peaking – this can be extremely risky and often leads to losses.

9. Rebalance your portfolio regularly: Rebalancing your portfolio helps ensure your investments align with your risk tolerance and long-term goals.

Conclusion

Cryptocurrencies have become an increasingly popular asset for investors worldwide, and their prices are mainly driven by inflation. As such, it is important to understand how inflation affects crypto markets and to take proactive steps when investing in them. By diversifying your portfolio, keeping abreast of the news, using stop-loss orders and understanding risk tolerance, you can help ensure that your investments remain profitable even in difficult economic times.