Inflation

Inflation means money loses purchasing power. You can buy fewer goods and services with the same amount of money.

What is inflation?

Inflation occurs when prices rise on average. If your income stays the same, you can afford less.

Inflation is usually reported as a percentage per year. To measure it, organizations compare the prices of a large basket of everyday goods and services with prices from a year earlier.

Price increases can have several causes, such as higher energy costs, raw material costs, and transportation costs, higher wages, or increased demand for products.

An example of inflation

Suppose prices are, on average, 3% higher than they were a year ago. The same basket of groceries, rent, and other regular expenses then costs more on average than it did last year.

You still have the same amount of money in your account, but it has less purchasing power. That’s inflation.

Why does inflation matter in crypto?

Inflation often comes up in crypto when people talk about Bitcoin and other tokens with rules governing new issuance. Some cryptocurrencies have a maximum supply. Other projects can add tokens quickly. This can affect how scarce a token is.

You may also come across the term burn. This is when tokens are destroyed, which can reduce the supply. Stablecoins are pegged to fiat currency, such as the euro or dollar. They don’t automatically protect you from inflation in those currencies.

A fixed supply doesn’t mean crypto is a safe hedge against inflation. Crypto prices can fluctuate significantly, and every project has its own risks.