If you know of Bitcoin, you’ve likely heard that the price has been on a steep incline with massive gains in value over the past few years. And if you’re like most people, this means that trading in crypto has been a very profitable endeavor.
Unfortunately, the reality is that these previous gains have inspired many newcomers to get into crypto and push up prices further, which is two-fold bad for holders of coins. Firstly, these new users are unfamiliar with how the price has risen and could get spooked by the recent rapid rise in value. These newbies are more likely to be tempted to sell coins for fiat currency or cash out for a digital product. This, in turn, would further spark the devaluation of crypto as people sell their investments to buy consumer goods.
Secondly, the massive influx of new users and money has pressured exchanges (where people exchange fiat and cryptocurrency).
This brings us to the economic phenomenon of inflation vs deflation. Bitcoin is the most famous deflationary token in the world. It was created to serve as a deflationary currency. Its value only decreases over time as more and more people begin to trade it for goods and services. There are many reasons why Bitcoin relies on deflation. One of them is that its price can be greatly influenced by other things such as speculation rather than its intrinsic value.
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How Cryptocurrency Affects Deflation & Inflation
When a cryptocurrency is being used for long-term value creation, it has an important role in the market. This is because it helps to mitigate deflationary pressures in the crypto-economy. Cryptocurrency increases the value of all other coins by reducing transaction costs.
Theoretically, this will lead to more people buying into cryptos and reduce transaction costs further as demand increases. For this to work, there need to be new users joining the ecosystem every month or so.
To understand the concept of inflation vs deflation a little bit better, let’s take a look at what we mean by deflation. Deflation occurs when an asset or currency weakens in value over time. When an increase in credit reaches a natural limit, the spending stimulus might result in inflation. In this example, too much credit can cause prices to rise on consumer goods and services, leading to inflation.
Cryptocurrency can also help reduce inflationary pressures in a market by infusing more money into the economy. This is because there will be more money being used in the market, increasing the demand for cryptocurrencies as a medium of exchange. The value of all available coins will increase as long as new users are buying into them.
How exchanges can destroy the Crypto Ecosystem
The crypto world is new, and the ecosystem is still in its infancy. In short, very few merchants accept cryptocurrencies (or fiat currency, for that matter). As a result, no one has had any use for them for quite some time. That means you’re unable to use your holdings as a medium of exchange as there is no one out there willing to buy or sell them.
When a currency is not being used to make transactions, it is not even a currency in the first place. This makes sense because there is no incentive to want to hold onto a coin when a coin is not being used. Unless someone wants to speculate on the future value of this coin, they will sell their coins for the fiat currency they want. This creates a massive deflationary pressure in the crypto-economy as the available coins shrink and value decreases. Many malicious entities will also flood exchanges with fake coins to drive prices lower.
In this scenario, there is no real value being created in the market, and prices can go into free-fall mode, which could be disastrous for companies and investors who bought in at these levels.
A Healthy Crypto Deflation
There is a very simple solution to combating these problems. When prices rise, the new users should invest in the coins they believe will have long-term value. These users create value by holding onto their coins instead of selling them for fiat currency. This means that the money being put into crypto stays in crypto, thus driving up the total market cap for all available coins. The user subsidizes future growth by buying into a coin before its price rises.
In this way, the price of coins does not rise as quickly as if many new users were entering the market every month. Over time, prices will gradually rise as long as traders continue to buy into coins due to their perceived long-term value. If more people decide that crypto has real value and start investing in it, prices will be much higher today.
The main difference here is that the currency will not be deflating as it was in the previous scenario. New users are investing in crypto in this scenario, creating a healthy deflationary pressure to drive up prices. These investors are also starting to use crypto as a medium of exchange, and this will add more long-term value to the market by reducing the costs of buying and selling cryptocurrencies.
This can create new value in a market that needs it and create more growth for holders of coins. If more people want to hold onto their coins instead of selling them for fiat, fewer coins will be available on exchanges. This constraint would mean that when people decide to sell their coins, the price will increase by a larger percentage than usual.
The transaction fees will also decrease because fewer coins will be used. This means less money is spent on miners, who process transactions and create new coins in the ecosystem. These investors will create real value for the system, and by participating in it, they increase their holdings.
It’s important to note that this voting system only works if people vote with their wallets to support the coin with their investment. If people sell their coins on exchanges as soon as they buy them, this voting system will not work.
To do this, every investor and user must become familiar with the projects they are buying into. They need to research the team behind the project, why they created the coin, and how they plan to use it in the future. By taking part in these projects, you’re creating long-term value in your investments and growing crypto as a whole.
