In this article, we are going to take a look at crypto price inflation. In other words, why does the price of cryptocurrency go up?
Before we get into cryptocurrency price inflation, let’s take a look at the dollar. As we all know a dollar is just a piece of paper with a Presidential head on it, it has no intrinsic value on its own. However, for some reason, people will accept this piece of paper in exchange for goods and services. In reality, the dollar is actually backed by the government. The government states that this piece of paper is equal to 1 Dollar. If you have a government with some credibility this system can work. The government can’t back the currency without any credible means of doing so. For example, if the currency is actually worthless and the government says they will pay you 1 Dollar for this paper; people would continue to exchange their worthless bills until the government was completely out of money. In reality, this system can only work if the currency is actually worth what the government claims it is worth.
The way this happens, in simplified terms, think of the dollar getting its value from the labor (GDP Gross Domestic Product, or what a country produces yearly). Taking it further, think of all the goods and services that are produced by the United States on a yearly basis. When you add up the total Gross Domestic product and divide by the total amount of money in circulation basically will tell you the value of a dollar. Market forces help ensure that this will remain true to the actual value of the currency.
What is the Problem with this Model?
What happens when the government that is backing this currency decides to extract some value from the currency themselves? Governments are in charge of printing the money as well as guaranteeing it. Governments realize that is they just print more dollars (or any other currency), things basically remain the same for the whole. They can then keep these extra dollars, or give them to some of their friends or Big Business partners. Each extra individual dollar that is printed is only reduced in value by a small amount. Unfortunately, money is one of those things you simply can’t have enough of. Once governments get a taste of this fast and easy money, they tend to extract more value then they should, this leads to a drop in the value of that currency.
Both Brazil and Venezuela have been recent victims of this type of behavior. These governments have both extracted all the value from the currency rendering it basically useless. For more on Inflation and Central Banking, read my article on Where Does Money Come From?
How does this concept relate to Cryptocurrency?
As mentioned, governments extract value from their currency by printing more, and that currency has less value. The value is essentially being stripped from the citizens of that country, that participate in the countries financial trade system.
Now, let’s bring in the crypto model for comparison. Contrary to the first model, the crypto method is controlled by everyone within the community and not by a central agency or government. This setup also makes it impossible for one person to control the system, thus no one can extract value from the currency.
Bitcoins are created based on the number of transactions taking place. Each new block that is mined contains a transaction within it that is paid to whomever mines the block. The current rate for mining a block is 12.5 Bitcoin. This is the only way that new Bitcoins are created, they cannot be mined without a block of transactions. The amount of the mining reward continues to go down as more Bitcoins are mined. Another thing about Bitcoin is there is a limit, there will only ever be 21 Million Bitcoins in circulation, the fact that the supply is not infinite also controls inflation.
There is no doubt that money, in any country is what drives the world. It seems that our current system has many flaws. Cryptocurrencies produce a viable solution to this problem. Although in their relative infancy, they threaten to destroy the dominance of the current banking system as we know it.