Despite the popularity of crypto currency, many still question whether or not the technology has any role to play in inflation. While crypto isn’t a store of value in the traditional sense, it’s important to recognize that a small amount of crypto can have a dramatic impact on prices. It’s also important to remember that there’s no technological issuance limit on crypto, so the technology isn’t limited in how much it can be issued.
Bitcoin’s fixed supply
Despite its growing popularity, the question remains: Does the fixed supply of Bitcoin play any role in inflation? The question is important because it affects the price of the cryptocurrency.
For those who are unfamiliar with the concept, Bitcoin is a digital asset, similar to an energy resource, but it does not have a physical cash flow statement, balance sheet, or board of directors. Instead, it uses a cryptographic protocol. The protocol only allows a fixed rate of new bitcoin creation.
The amount of bitcoin is limited to 21 million coins. That means that the price of the asset is not going to skyrocket. The price is driven by market demand. It also depends on the availability of the asset. Unlike traditional currencies, however, the amount of bitcoin is not correlated to inflation.
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The limited supply allows the asset to resist inflation. This is why investors treat it as a macro investment, and why it has become popular in countries with high inflation.
This has led to a strong rally at the end of 2020, when the price hit new all-time highs. The crypto community was boosted by the media’s coverage, and an influx of institutional investors. The crypto industry has the potential to be an attractive alternative in developed countries, as well as in countries with high inflation.
The price of the asset can rise in response to inflation. However, it is unlikely that the price of bitcoin will rise to the point where the supply reaches 21 million. This is because the reward for mining a block will decrease in roughly four years. That will create a deflationary effect, and slow the rate of supply increase.
Ethereum’s no technological issuance limit
Whether or not Ethereum’s no technological issuance limit plays a role in inflation is still up for debate. While it is true that there is no technological issuance limit for Ether, the coin has a programmatic issuance schedule, which is designed to keep the supply steady over time.
The issuance of the coin, which is called the ether, has been decreasing since August 2021, when protocol update EIP-1559 was deployed. The coin’s issuance rate will be cut in half by year’s end.
The biggest question that surrounds the question of whether or not the coin is deflationary is whether or not the ether will burn through its supply, which is currently estimated to be in the hundreds of billions of dollars. If the coin is deflationary, it means that the supply of Ether will be decreasing at a rapid rate, which could result in an increase in the price of Ether.
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While the price of Ether has remained stable, the coin has undergone a few protocol upgrades in the past year. These upgrades, which are referred to as hard forks, will change the functionality and incentive structures of the coin. Among these is a new proof of work (PoW) algorithm that is designed to improve transaction speeds and lower transaction fees.
While the new proof of work algorithm will likely improve the functionality of Ether, it won’t necessarily be the end all and be all of the coin’s performance. One of the biggest changes that the new algorithm will introduce is the ability to create so-called non-fungible tokens (NFTs). NFTs represent a tokenized version of an associated asset. This could be anything from a limited-edition collectible to a piece of digital art.
Solana’s value tanked in recent months
During the last year, the Solana crypto’s value has tanked. As of Friday, it has fallen by over 70% from a high of $1 billion. That’s a staggering amount of change in less than a month.
The good news is that Solana’s network is now running again, and has been upgraded multiple times. It’s also minted a number of NFTs, which could make it a formidable competitor to Ethereum.
The bad news is that Solana’s native token, SOL, barely budged following a hack that drained thousands of wallets. A hunch from Solana’s engineers suggests that the hack was triggered by mobile wallets. Wallets have limited recourse, so they likely won’t be able to recover the lost funds.
Another notable statistic is that Solana’s total value locked has decreased by over $10 billion in the last year. In addition to the SOL’s obvious drop, the rest of the DeFi tokens have also seen their market value fall. That’s a lot of change, and could have a huge impact on the crypto’s overall market cap.
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The Solana ecosystem has suffered a whirlwind of bad news over the past week. The biggest hit came from lending platform Solend, which took a hit of nearly 70%. Another huge loss was the crypto exchange Avalanche, which dropped nine percent. Interestingly, the crypto’s biggest competitor, ether, also took a hit.
There’s no telling what the future holds for cryptocurrencies. Whether it’s institutional adoption, increased market uncertainty, or a runaway inflation, they’re all possible. It’s a good idea to stay on top of what’s happening in the crypto world.
The best way to tell whether a crypto is going up or down is to watch it’s volume. The Ukrainian hryvnia-denominated crypto market has continued to be strong, with a record weekly volume.
CWT’s multi-scale analysis tool
CWT (Continuous Wavelet Transform) is a multi-scale analysis tool that shows volatility of a variable across different time horizons. It also shows frequency components of a variable over time. This helps in understanding the lead-lag relationship between a variable and its related series. In the case of inflation, it helps to know the hedging capacity for long-term inflation risks. It also provides information about the relationship between a currency and its forward inflation expectations. In addition to that, it can also show the trend of the original series. CWT is a useful tool for finding areas of high or low correlation between a variable and its series. CWT can help determine threshold levels of interest rates and inflation and provide valuable information to researchers, economists, and investors. CWT is also useful in determining the relationship between cryptocurrencies and forward inflation expectations.
In the case of inflation, high volatility in the short term (four to eight months) and medium term (eight to sixteen months) is observed. Almost all significant regions show anti-phase behavior, while a primary exception occurs at horizons greater than days from early 2020. The long-term (32 to 64 months) and very long-term (over 128 months) time horizons show significant time dynamics. This is evidence of the positive impact of inflation on economic growth.
In the case of cryptocurrencies, changes in the price of a coin moved in lock-step with changes in forward inflation expectations. A significant increase in the price of Bitcoin occurred around mid-March, while forward inflation expectations fell by 68% between January 2020 and March 2020. The forward inflation expectations recovered to the January level by 31 July 2020.
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Increasing utility led to price stability
During the recent market downturn, the crypto markets have displayed a pronounced upward and downward trend. In fact, the market has gone through a number of cycles, and one can expect the same to continue. For example, the COVID-19 sell-off is one of the more recent episodes of the crypto markets going haywire. However, the crypto markets have been known to perform the same tricks with aplomb. During a high inflationary environment, the crypto markets are known to exhibit a number of positive and negative characteristics. For example, the major cryptos like Bitcoin and Ether have experienced price spikes and troughs over the past several years.
One of the best ways to hedge your crypto bets is to buy and sell stablecoins. The reason is that stablecoins are generally not prone to the pitfalls of volatile markets. In fact, they offer the advantage of reducing risk between trades, and may also help in the long run by allowing you to convert crypto to fiat currencies.