Ethereum as a deflationary asset, explained
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Loading... - Arjun Anand
- 24 Mar 2023
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What is a deflationary cryptocurrency?
Although cryptocurrencies are often promoted as investment opportunities, their primary purpose was originally to serve as an alternative form of currency. Considering this narrative, the rules of supply and demand apply to cryptocurrencies as to fiat currencies.
An undergraduate economics student might say the basics of money, economy and market forces is balancing supply and demand. How much of an asset is in circulation versus the demand — how many people want that particular asset — helps decide its price. This equation between supply and demand underlies the fundamentals of all economies and also applies to cryptocurrencies.
Deflationary cryptocurrency is one where the value of the crypto increases due to a reduction or stagnation in supply. This ensures that the coin’s market value is attractive for more people to invest in and can be used as a store of value. While deflationary cryptocurrencies look more attractive, not all are designed that way.
Many well-known cryptocurrencies are not deflationary. In addition, there is often no supply limit to them. Some are disinflationary because inflation gradually reduces over time due to its tokenomics. Bitcoin (BTC), for instance, won’t be deflationary until all 21 million coins have been mined. Ether (ETH) was not deflationary until the “Merge” happened in September 2022. Read More…
