Invest
Inflationary v deflationary cryptos: What investors need to know
Whether a cryptocurrency is deflationary or inflationary is an important detail to think through before you put your money into one.

Inflationary v deflationary cryptos: What investors need to know
Whether a cryptocurrency is deflationary or inflationary is an important detail to think through before you put your money into one.

Are inflationary cryptocurrencies a better fit for investors than deflationary ones? The answer isn’t so simple.
Speaking to nestegg, Byron Goldberg, Luno’s country manager for Australia, started by pointing to the similarities between inflationary cryptocurrencies and traditional fiat currencies like the US and Australian dollars.
He explained that, “in essence, an inflationary cryptocurrency is one where its supply (or the number of coins in circulation) continues to grow — like the fiat system, where governments are able to print money”.
On the flip side, Mr Goldberg said that a deflationary cryptocurrency is one where the supply shrinks over time.
Eventually, this “causes the digital asset to become more scarce — and potentially more valuable due to rising or stable demand, but a decrease in supply”.
For investors looking to gain a more practical understanding of what the difference between deflationary and inflationary cryptocurrencies looks like, Mr Goldberg said that there are a number of examples.
Right now, bitcoin is considered to be an inflationary cryptocurrency, “since we have a steady supply of new coins entering the market”.
Given enough time, that will change.
“Once all bitcoins are mined, the asset will likely become somewhat deflationary over time, given the maximum supply of 21 million and the fact that many people will either lose their bitcoin or inevitably pass away, thus 21 million becomes a theoretical maximum and the supply actually decreases,” he explained.
When this happens, Mr Goldberg said that the shrinking quantity of bitcoin will likely begin to squeeze demand and push prices even higher.
Ethereum’s recent changes provide a sneak peek of this dynamic in action.
As a result of the second-largest cryptocurrency’s recent “London Hard Fork” network upgrade, a small proportion of each transaction fee made using the network will be burned, removing it from circulation.
“Now, instead of miners receiving newly minted ETH and transaction fees as a reward, they receive the block reward plus an optional tip, slowing down the total supply with each transaction, [but] still leaving ethereum as an inflationary currency,” Mr Goldberg explained.
“As a result, we’ve already witnessed a decrease in inflation, or what’s known as disinflation — where inflation decreases but persists — but not exactly true deflation just yet.”
The other big deflationary-related change made by the London Hard Fork is the implementation of a “difficulty bomb” in December, which promises to pave the way for ethereum’s eventual transition from a proof-of-work model to a proof-of-stake model.
When the December deadline rolls around, the difficulty of mining ethereum will increase exponentially at a rate that the hardware of miners cannot keep up with. The idea here is that making mining obsolete will sideline any potential opposition to the network’s broader transition to a proof-of-stake model, making the shift inevitable.
When that happens, ethereum is expected to become fully deflationary.
“As the ethereum network burns more of its tokens, investors expect ether to accelerate gains, as the reduction of supply will increase the perceived value of ETH already in existence,” a recent report by Luno predicted.
About the author

About the author


Cryptocurrency
New Cosmos ETF offers access to ethereum
Cosmos Asset Management has launched another crypto ETF in Australia. ...Read more

Cryptocurrency
1 in 9 Australians have purchased crypto in the last year
A consumer group has released new data into crypto-assets. ...Read more

Cryptocurrency
CBA hits pause on in-app crypto tool
CBA has paused the rollout of in-app cryptocurrency trading. ...Read more

Cryptocurrency
European Central Bank president says crypto is ‘worth nothing’
European Central Bank president Christine Lagarde has shared her views on the value of crypto and the importance of regulation. ...Read more

Cryptocurrency
Will ‘cryptogeddon’ follow the stablecoin crash?
The collapse of TerraUSD last week sent the crypto market into a panic, raising fears about broader financial implications. ...Read more

Cryptocurrency
UNSW receives largest known crypto donation to fund pandemic detection tool
UNSW Sydney has received the largest known cryptocurrency donation to an Australian higher education institution. ...Read more

Cryptocurrency
Three new crypto ETFs commence trading following setbacks
The new crypto-based ETFs have been launched on the Cboe Exchange. ...Read more

Cryptocurrency
Consumers spending more through crypto-linked payment options
Cryptocurrency exchange Crypto.com said that spending via its crypto-linked card had increased, particularly on fashion, transportation, hotels and dining. ...Read more

Wrapping up an eventful 2021
Listen now

What Omicron means for property, and are units right for first-time buyers? What is equity crowdfunding? Are industry super funds tapping into member funds to save their skins?
Listen now

Will housing affordability improve in 2022? Will buy now, pay later become the norm? Why are Aussies staying in failing super products?
Listen now

Who really benefits from crypto ETFs? How will the RBA respond to rising inflation? Could a mandate help address unpaid super?
Listen now

Cryptocurrency
New Cosmos ETF offers access to ethereum
Cosmos Asset Management has launched another crypto ETF in Australia. ...Read more

Cryptocurrency
1 in 9 Australians have purchased crypto in the last year
A consumer group has released new data into crypto-assets. ...Read more

Cryptocurrency
CBA hits pause on in-app crypto tool
CBA has paused the rollout of in-app cryptocurrency trading. ...Read more

Cryptocurrency
European Central Bank president says crypto is ‘worth nothing’
European Central Bank president Christine Lagarde has shared her views on the value of crypto and the importance of regulation. ...Read more

Cryptocurrency
Will ‘cryptogeddon’ follow the stablecoin crash?
The collapse of TerraUSD last week sent the crypto market into a panic, raising fears about broader financial implications. ...Read more

Cryptocurrency
UNSW receives largest known crypto donation to fund pandemic detection tool
UNSW Sydney has received the largest known cryptocurrency donation to an Australian higher education institution. ...Read more

Cryptocurrency
Three new crypto ETFs commence trading following setbacks
The new crypto-based ETFs have been launched on the Cboe Exchange. ...Read more

Cryptocurrency
Consumers spending more through crypto-linked payment options
Cryptocurrency exchange Crypto.com said that spending via its crypto-linked card had increased, particularly on fashion, transportation, hotels and dining. ...Read more