Inflation

Inflation can be defined in one of two ways:

• A decrease in the purchasing power of a currency
• A increase in the total supply of said currency

While both are connected, there are slight differences.

For example, if demand for a currency is high, it's possible for the number of units in circulation to increase while the purchasing power also increases.

In the case of Bitcoin, this happens whenever the price goes up, because 1 BTC is now worth more and, at the same time, there are more total Bitcoins in circulation, due to the fact the new coins are created for every block mined.

Causes for Inflation

Demand-Pulled Inflation

If demand increases, then more money will be spent buying up the same amount of products, leading to a increase in their price, which equals more inflation.
This is considered by Governments 'good inflation' for fiat currencies, if done in small amounts.

Lower Demand for the currency itself can also mean more Inflation, because in that scenario it's purchasing power drops, due to the fact that less people want to hold that currency. People who argue crypto is going to fail say this is what it's going to happen.

Cost Push Inflation

If the price for most goods increases, namely, essential ones, like food, water and electricity decreases, then what you can buy for 1 unit of currency goes down, which is the same as saying that inflation went up.
This is also called 'bad inflation'.

Conclusion

Inflation is not only important for long-term government policies and money management, it's also crucial when crypto-investing! If a coin increases it's supply too fast, it's price might trend downwards.

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Also check out the previous post!