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What Is Inflation in Cryptocurrency?
Beginner
2025-06-24 | 5m
What Is Inflation?
Inflation is the slow depreciation of currencies over time. This refers mostly to fiat currencies, like the dollar or euro, since some cryptocurrencies like Bitcoin have a fixed supply and a predictable rate of inflation that will eventually end at zero. Fiat currencies, on the other hand, do not have predictable rates of inflation. For example, a dollar in 1972 had more value than a dollar in 2022 because it loses a few percentage points in value each year due to inflation.
For this reason, prices rise in an inflationary system. Producers and consumers seek to maintain their purchasing power. In other words, they want to be able to buy the same amount of goods despite a nominal rise in prices.
How Does Inflation Work?
There are three types of inflation:
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Monetary Inflation: The expansion of the money supply. This is the amount of currency in circulation and refers to cash, deposits at commercial banks and the general account of the Treasury at the Federal Reserve (something like the government's bank account in case of the US).
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Consumer Price Inflation: Rising prices cause consumer price inflation. This can be due to scarcity of goods, for example, if supply chains are not working as they should, or a sudden increase in monetary inflation.
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Asset Price Inflation: The increase in asset prices like real estate, stocks, gold and cryptocurrencies.
Is Cryptocurrency Causing Inflation?
Cryptocurrencies do not cause inflation since they do not expand the money supply. However, inflation can cause a rise in the prices of cryptocurrencies. For instance, Bitcoin is a cryptocurrency with a fixed supply of 21 million coins. The scarcity of Bitcoin attracts many investors that look for a hedge against monetary inflation.
Is There Inflation in Cryptocurrencies?
Cryptocurrencies also experience inflation. But inflation in crypto works differently than with fiat currencies, depending on their token model. Bitcoin, for example, has a fixed and predictable inflation rate that will go to zero once all 21 million coins have been mined. Therefore, many expect Bitcoin to rise in value over time since its fixed rate of inflation makes it a scarce good.
Ethereum, on the other hand, has a rate of inflation that depends on several factors, like the amount of tokens staked and how many transactions need to be processed. This can make Ethereum even deflationary, meaning more ETH is burned than created.
Yet there are some cryptocurrencies that have no fixed supply and are inflationary similar to fiat currencies.
Cryptocurrency and Inflation: Is it a Safe Protect or a Risk?
Bitcoin: Digital Gold Against Rising Prices
Bitcoin is the first form of digital money that isn't controlled by any government or bank. Many view it as a way to protect against inflation because there’s a limited number of Bitcoins—only 21 million will ever exist. Also, Bitcoin’s production gets cut in half roughly every four years through a process called "halving," which helps prevent too many coins from being created. For example, in 2024, the reward for mining new Bitcoin will be cut in half again. Unlike paper money, which can be printed indefinitely, Bitcoin’s supply is fixed.
Look at the numbers: Bitcoin was worth less than a dollar in 2009 but soared past $64,000 in 2021. Over ten years, its value grew by more than 230% per year, making it much better than stocks or gold over the same period.
Does Cryptocurrency Keep Its Value During Inflation?
It depends on the coin:
Bitcoin tends to keep its value better during inflation spells because of its limited supply. For instance, during the COVID-19 pandemic in 2020, when governments and banks printed trillions of dollars, Bitcoin’s price jumped from around $3,800 to nearly $29,000—a big increase.
But not all coins behave this way:
Stablecoins (like USDT): These are tied to traditional currencies like the dollar. If the dollar loses value because of inflation, these stable coins can also lose value.
Inflation-oriented coins (like Ethereum before its upgrades): Some coins issued more tokens every year, which could dilute their value if demand doesn’t keep up.
Short Term Price Swings vs. Long Term Stability
Even though Bitcoin is designed to resist inflation, it’s still highly unpredictable day-to-day:
In 2017, Bitcoin’s price plummeted from $20,000 to $6,000 within three months.
In 2021, it dropped from $64,000 to $33,000 in just ten days.
Important to know: Bitcoin’s ability to hold value over time doesn’t mean its price won’t fluctuate wildly in the short run. Market news, regulations, and technology issues can cause big jumps or drops.
Why Does Inflation Affect Cryptocurrency?
Changing money flows:
When inflation makes traditional money less valuable. For example, the U.S. experienced 9.1% inflation in 2022—people sometimes turn to crypto as a way to protect their savings. During that year, Bitcoin’s price went up by about 60%, though it later dropped when interest rates increased.
Value of scarcity:
Bitcoin’s limited supply makes it similar to gold—considered a precious resource that’s hard to produce more of. Its constant, predictable issuance schedule boosts this idea.
Distrust in governments:
High inflation can lead to less trust in central banks and governments. Because cryptocurrencies are decentralized and not controlled by any single authority, they appeal to people seeking alternatives. For example, in Argentina, where inflation topped 100% in 2022, Bitcoin use increased by 200%.
5. Final Thoughts: Can Crypto Help Protect Against Inflation?
Advantages:
- Bitcoin and some deflationary coins might protect your money in the long run from rising prices. A small investment—maybe around 5% of your total portfolio—could help.
Risks:
- Cryptocurrency prices are very unpredictable in the short term.
- Regulations could change suddenly (like China banning crypto).
- Technical problems, like hacking into smart contracts, can also cause losses.
Tips for Investing:
- Use dollar-cost averaging (DCA): regularly buy small amounts of Bitcoin to avoid buying at bad times.
- Don’t put all your money into crypto—it's wise to diversify your investments.
- Be cautious of scams claiming to protect you from inflation—they often don’t deliver.
Bottom line: Cryptocurrencies, especially Bitcoin, have the potential to help you hedge against inflation, but they are not guaranteed safe. They are better suited for investors willing to accept higher risks and should only be a small part of a diversified investment plan.
Summary
In periods of extreme inflation, societies often experience rapid deterioration. During such times, many governments tend to increase money issuance, which can further devalue their currencies and exacerbate cycles of poverty.
Fortunately, there is evidence to suggest that broader adoption of cryptocurrencies, particularly Bitcoin, may help mitigate some of these challenges.
It is increasingly apparent that the future of the global economy and digital currencies are closely interconnected.
How these two elements will influence each other remains uncertain. We will need to observe how the evolution of cryptocurrencies unfolds in the coming years.
CoinCatch Team
Disclaimer:
Digital asset prices carry high market risk and price volatility. You should carefully consider your investment experience, financial situation, investment objectives, and risk tolerance. CoinCatch is not responsible for any losses that may occur. This article should not be considered financial advice.
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