ZoneBitcoin EditorialFrankly, you can't be a good crypto investor if you don't know the difference between the two types of cryptos. Even if this does not mean that you have to invest in one type or the other, it is just that it is essential to understand the internal mechanics of said crypto.
In monetary economy, there are therefore large groups of cryptos.
- Inflationary cryptos: Inflationary currencies have no limit in the creation and issuance of tokens. It’s unlimited in terms of supply. The idea is that, all things being equal, the purchasing power of inflationary cryptos tends to decrease as there are more cryptos in circulation. Remember the German Deutsche Mark and the images of wheelbarrows of money to buy bread….
- The crypto deflationists: There, there is a well-defined maximum supply like 21 million bitcoins for example. There, the currency becoming more and more scarce (assuming an increasing demand otherwise it makes no sense), then the value would tend to increase.
Moreover, it should be noted that generally fiat currencies (dollars, euros) are inflationary (because they can be created at any time deemed necessary by the government) while cryptos are "often" but not always, deflationary before a fixed and limited supply.
So far, you're thinking "OK, I get it all", should I only invest in deflationary cryptos?
Well, you might think it’s not that simple…
The difference between inflationary and deflationary cryptos
● The exchange rates of fiat currencies are "floating". Their value is relative to other currencies and is not fixed as was the case with the dollar indexed to gold for example before Bretton Woods.
● To the extent that new units of money can be created at any time, they become inherently inflationary.
● The more units there are in circulation, the more the rarity decreases and the more the value drops (in probability).
Where is the value of currencies?
When the dollar was pegged to gold, it was "simpler" in theory to understand the value of our currency. An American citizen could, for example, go to the bank and receive gold in exchange for his money. The currency simply served to represent the amount of gold owned. This was what was called the gold standard, then.
With Bretton Woods, in 1971, under Nixon, American banks abandoned the gold reserve attached to the dollar. Then, most countries followed the United States' lead. So, from then on, currencies became floating. January 8, 1976, the Jamaica Accords officially confirm the abandonment of the international legal role of gold. There is no longer an organized international monetary system. » (see the Bretton Wood article on Wikipedia).
Since there is no longer any "objective value" like gold or any other material good, these currencies only have value according to a general agreement, a consensus, a global and generalized trust.
–> Read the article: The abandonment of gold dollar convertibility by Nixon in 1971
Moreover, etymologically, the word "fiduciary" comes from "fiducie", which means "trust" (fiducia in Latin).
With the end of the gold standard, fiat currencies were able to become inflationary. No need to have gold in reserve to create new banknotes. At will and this is precisely what the American central bank and those of other European countries do (even if in Europe, the fear of inflation is very strong, it does not prevent a lot of printing money ).
Thus, the amount of currencies in circulation continues to increase. And, naturally, purchasing power decreases because of inflation…
Crypto deflationists are not tied to maximum supply
Bitcoin will have no more than 21 million bitcoins issued. Not a plus or a minus. Today, around 18 million BTC have already been mined. When the total sum is reached, then bitcoin will logically become deflationary.
You should know that there are different ways of being deflationary. For example, Ripple (XRP) mined all of its XRP (i.e. 100 billion) from the start of the project. This is called a pre-mined project. More than half, or 55 billion, have been blocked in a special account and the rest of the 45 billion is decreasing day by day. This is because each transaction destroys a small amount of XRP. You should know that Avalanche chose a similar system.
Likewise, there are cryptos without fixed limits as is the case of'Ethereum which are not, however, inflationary. Indeed, the creation of new ETH can certainly be done but this also follows the destruction of cryptos as well. It is even a deflationary crypto because of this mechanism.
Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.
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