Inflation refers to a fall in the purchasing power of money, often accompanied by a general increase in prices.
The Long Explanation
Perhaps the most simplistic definition of inflation is that it is a process via which currencies lose their value over time, leading to an increase in the price of goods and services.
In monetary economics, it is defined as the growth in money supply minus the growth in the total value of goods/services in the economy. When inflation happens, the affected economy enjoys an increase in its money supply without any corresponding increase in the value of the economy.
This supply glut ultimately means that more people have access to money, forcing them to demand more for the services they render or the goods they sell.
By design, the traditional economy is prone to inflation, often entering into a loop known as the inflationary spiral. Whether this is good or bad for the economy depends on who you ask.
However, it is generally recognized that low levels of inflation help boost the economy as a growing money supply stimulates spending, investment, and borrowing. Should inflation spiral out of control, though, prices of goods may rise so much faster than wages, and make the economy unbearable.
Interestingly, cryptocurrencies are generally designed in the opposite direction – known as deflation. This means that they’re built to continue to increase (rather than decrease) in value over time.
Using deflationary mechanisms like fixed supplies, token burning, and more, they hedge against inflation as their value generally moves upward rather than downward. Crypto’s lack of centralized controls like the Central Bank also helps ensure its value isn’t easily manipulated (up or down).
As investment in crypto has surged over the years, though, its continued volatility has led many to wonder whether it can serve as a true store of value. Market dips can often see digital currencies lose up to 40% of their value in a very short time.
Although dips have often been followed by highs – particularly in more traditional cryptocurrencies like Ethereum and Bitcoin, extreme volatility has remained a concern for many crypto investors.