Investment Fundamentals: Circulating Supply and Yearly Inflation’s Impact on Price

TLDR:

High inflation in a cryptocurrency will reduce its potential gains.

Inflation is no different in crypto than it is with fiat currencies. It is simply a decline in purchasing power. In crypto, this means that crypto X can purchase (be exchanged for) fewer USD.

As many of you know, an increase in an asset’s price could be due to various reasons – from fundamentals, price action, hype, or even market manipulation. Let’s keep all these variables constant for a comparison between two cryptos with different inflation rates: crypto X and crypto Y.

Assumptions:

Both X and Y have a price of $1 and a total supply of 1000. X has a circulating supply of 1000, while Y has a circulating supply of 910, and the remaining 90 will be supplied by the end of the year (EoY). X and Y have market caps of $1000 and $910, respectively.

Therefore, the inflation rate for X is 0%, and for Y, it is 9.89%. Assuming the same market cap by EoY, the price of X will remain $1, while the price of Y will fall to $0.9011 – a reduction of 9.89% equal to its inflation rate.

When deciding to invest in a cryptocurrency, please also consider its tokenomics.

Notes:

Of course, there are many more variables involved, including liquidity available for both assets. However, to illustrate my point, I tried not to overcomplicate the example.

Good chance everyone,

DirpyDip