In recent years, economic crises have introduced people more or less to the concept of inflation. Different definitions have been proposed for this economic phenomenon; But some of them are not so logical. Undoubtedly, all people have felt the impact of inflation on their lives. The inflation we are talking about has taken place in the economies of different countries, and we can say that many national currencies have been involved in this phenomenon in some way.
What does inflation have to do with the national currencies of the countries? In response, we must say that people usually interpret inflation in the form of rising prices for goods and services; But in reality, inflation is equivalent to devaluing money and reducing purchasing power by a certain amount of money per unit time.
Inflation can have many complex causes and there are several ways to control it in the economy. However, one of the factors influencing inflation is the type of assets we are dealing with. In fact, the nature of some assets «inflation“And the nature of some others”Anti-inflation“E.
In this article, we intend to define inflationary and anti-inflationary assets by looking at the way money is presented. Then let’s give some examples of traditional and digital assets. At the end of this article, you will gain a deeper understanding of inflation and its root cause, as well as the importance of knowing the supply ceiling of your assets. So stay tuned.
In general, inflation, as an important concept in the economy, is directly related to money supply. To better understand these concepts, let’s compare bitcoin and fiat currencies.
If you are a little familiar with bitcoin, you know that the total supply ceiling for this digital asset is 21 million units; This means that the number of available bitcoins will never exceed this amount. About 19 million units of this digital asset have been extracted so far, and no additional bitcoins will be produced after the extraction of another 2 million units.
Read more: What is inflation?
In contrast, Fiat’s flow of currencies, such as the dollar, is a bit more complex. There is no supply ceiling for these assets, and the amount of money in people’s hands is determined solely by central bank policies. Meanwhile, only the central bank has the right to collect and destroy new printed money or old and defective money. Therefore, central banks are responsible for planning the fall or rise of Fiat’s currencies during the financial crisis and have full control over bank interest rates.
The relationship between interest rates and inflation is one of the topics on which there are different points of view. Economists believe that lowering bank interest rates will bring more money into society, which could have a significant impact on inflation in national currencies. Of course, this is the opposite from the point of view of some experts, and they consider raising bank interest rates to increase inflation.
Now that we know the definition of money supply, we can easily identify inflationary and anti-inflationary assets. If we accept this simple assumption that the less scarce the asset, the more valuable it is.
The value of national currencies, such as the dollar and the euro, decreases over time, as the central bank can print new money at any time and there are no restrictions on money production. For example, if the price of a good is $ 1 in 2020, $ 1.5 in 2021, and $ 2 in 2022, then the price of that good has not increased; Rather, the value and position of money are on a downward trend. The main reason for the devaluation of the Fiat currency is the increase in its printing by the central bank; This is a problem that reduces the amount of money, which is scarce over time.
In general, inflation is caused by an increase in money supply and a decrease in purchasing power.
Central banks do not interfere with the printing of money; Therefore, all major Fiat currencies today are considered inflationary, and all hypotheses and theories advanced in the economy are based on an inflationary model.
In contrast, deflationary conditions arise when purchasing power increases and, as a result, the price of goods and services decreases over time. The important thing about bitcoin is that there is no central bank that constantly prints money and adopts fiscal policies.
In fact, the process of delivering bitcoins ends when it reaches 21 million units. Then, any bitcoin that is lost or inaccessible is virtually removed from circulation permanently. In other words, over time, the overall supply decreases and this digital currency becomes more scarce and valuable.
We introduced bitcoin against fiat currencies as an anti-inflationary asset; But we cannot say that all digital assets are anti-inflationary. Both in the world of digital currencies and in the traditional economy, we are dealing with various inflationary assets, which we describe below.
The word “fiat” is a Latin word meaning “must be” or “let it be done”. In fact, Fiat’s currencies are valuable only because governments maintain their value. In the past, governments minted coins from valuable physical goods such as gold or silver. This asset can be redeemed for a certain amount of physical goods. However, Fiat’s currency is irreplaceable and cannot be redeemed simply because there is no collateral.
Because Fiat’s money does not depend on physical reserves such as gold or silver, it is at high risk of losing value in the event of hyperinflation. In events like what happened in Hungary after World War II, inflation could double in one day. Such conditions are considered hypertrophy.
Read more: What is the currency of fiat?
In addition, public confidence is an important factor in the growth or decline of the position in the fiat currency of the countries. This is very different from a gold-backed currency. The demand for gold in jewelry and the production of electronic devices, computers and airplanes is huge; Therefore, it makes the gold-backed currency more valuable.
As mentioned in the Money Supply section, any asset that does not have a limited supply is likely to be among the assets for inflation. Many digital currencies, such as DOT, have no supply limits. The Polkadat network has not set a ceiling for the delivery of .ot, and this percentage faces inflation of around 10% per year.
In the meantime, it should be noted that Dot’s digital currency inflation policies are designed to encourage consumers to share and use network assets. So far, more than 1.1 billion dot-coms have been released, of which about 987 million are in circulation and the rest have been burned in a specific process.
Although we seem to see only anti-inflationary assets in the crypto world, we must pay attention to the fact that non-inflationary assets also exist in the traditional market.
Read also: What is negative inflation and what effects does it have on the economy?
Gold has been a treasure for centuries because of its scarcity. No individual or group can create gold. In fact, the supply of gold is controlled by nature and is very limited. Gold is a rare and widely used metal in the electronics and medical industries; It is therefore obvious that high demand versus low supply makes this asset more valuable.
Gold is often used as an anti-inflationary coating for Fiat currencies; As you can see in the chart below, the supply of this precious metal has an almost constant rate of inflation.
It is interesting to note that the creators of bitcoin have also designed its inflation rate to mimic the stable inflation rate of gold. The chart below shows the 2009 bitcoin circulation.
Under constant conditions, when the rate of inflation decreases, the price of each bitcoin must increase. Bitcoin inflation rate is included in its software coding. Finally, the bitcoin inflation algorithm must turn this digital currency into a scarce and valuable asset.
In fact, bitcoin, like other value reserves, is scarce and popular and is considered an anti-inflationary asset. goes. In general, the anti-inflationary nature of bitcoin depends on two basic rules:
In addition, consumers’ desire to invest and store bitcoins increases the value of this digital asset. As we mentioned, about 19 million bitcoins have been mined so far, and some of them have been destroyed for various reasons and are no longer available. This makes this asset scarce and its anti-inflationary characteristics more pronounced.
It is estimated that events in Hawing will reduce the supply of bitcoins to zero by 2140. Suffice it to say that 19 million units of bitcoins have been released during the life of this asset for about 13 years, and the remaining 20 million units are expected to be released in the next 120 years! This gradual supply also increases the value of this digital asset.
It’s called the devaluation of money and the purchasing power of inflation. This often happens due to money leaks. In contrast, anti-inflationary conditions are determined by the scarcity and value of each asset. In this article, we explained that different assets can be inflationary or anti-inflationary, depending on the support and policies that follow to increase or decrease supply.
Inflation and anti-inflation assets are located in both digital and traditional foreign exchange markets. For example, in addition to Fiat’s currencies, some digital currencies, such as Pulkadat, also fall into the category of inflationary assets. Instead, assets such as gold and bitcoin are considered anti-inflationary because of the way they are offered, and their value increases over time.
The post What are inflationary assets and anti-inflationary assets? appeared first for currency.