Can a cryptocurrency inflate or is it a pure trade item we have seen a lot of volatility lately in cryptocurrencies but that has not been followed by and adoption in normal stores so can cryptocurrency inflate?
Price development
Prices can be affected by many other things than inflation and it's a rule of thumb prices for goods are determined by supply and demand This is not a simple function it is simple in principle but extremely hard to get right to get the optimal sale of your product you need to hit a sweet spot where all of your supply is sold in the same amount of time as you received new supplies. So let's see a car factory is hand crafting two cars a month then the factory needs to hit a price that covers all it's expenses and unload those two cars in one month and to not leave anyone out who can afford the car in the month.
And with the example of cryptocurrencies we cannot influence the supply due to the mathematical equation in which new supplies created we can influence the available supply buy either buying or selling, In small and do cryptocurrencies this will create big fluctuations if you can buy a big supply of the available amount but in thick currencies such as bitcoin and ethereum the tool suppliers so big that it will be almost impossible to purchase it all up and if we see more people getting into cryptocurrencies such as bitcoin and ethereum we see more people hold on to them and thereby creating a low available supply and the development we have seen towards the end of 2017 and throughout the year of 2017 bitcoin has seen a big price increase if it were true currency it would be the strongest one.
Inflation what is it?
The most Direct way to see inflation is when prices go up and I know I just told you the prices are determined by supply and demand but away prices can go up even when they have a steady supply and demand is through inflation so let's take a staple product for example we will take milk.
If a milk cost $1 And you have an inflation of 100% the middle cast $2 will this represent a problem because the price just doubled and it does not because in the inflationary process let's say you have a salary of $1,000 and we have still the same inflation of 100% so your salary is now $2,000 So nosy it is no problem with inflation that prices go up because so does salaries, But let's say you Have saved up for car before inflation the car costs $10,000 now we get it by inflation of 100% and the car now cost $20,000 we just learnt that our celery did increase and we have now saved up for our In over one year, But we have saved up $10,000 and the canal cost $20,000 and when the inflation hit our saving did not get influenced by inflation so we don't have the double amount of savings so in practice Inflation hits our savings.
A new problem arises when you have hyperinflation because even though you're celery and the product price are following each other when you got hyperinflation the salary you get Monday morning might not be able to buy you anything in the evening because the inflation Rises so fast That you cannot keep up with the price increase we saw this in Germany before WWII where people spend entire life savings on a loaf of bread.
Cryptocurrencies and inflation
There's a good debate whether or not cryptocurrencies can inflate as the market is right now, it is more of a trade commodity than a true currency, I know you can pay with Bitcoin, ethereum, litecoin and other cryptocurrencies in some places but in order to become a true currency we need widespread adoption and it is going that way, it it just not going that fast so right now, we are in a sort of a limbo where cryptocurrencies want to become currencies people want to support them becoming currencies. But the technology is just not there to let them become true currency. So right now we will not see a inflation we will see a price increase or decrease but as cryptocurrencies get more and more adopted, we will be able to see inflation and deflation in different cryptocurrencies.
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