Inflation: A "Deadly Trap" or Why You're Losing Money
If you are a beginner and can't figure out why seemingly a good #cryptocurrency that you bought only goes down and you keep losing your hard earned money holding that #crypto, your search is over and the answer is inflation. It is important that inflation is explained and understood in simple terms for every investor especially a crypto investor like yourself.
Failure to do so might result in you losing substantial amounts of money, I believe you my fellow reader want to put your money in the right basket and sleep calmly at nights, there are many other factors that create fear in the wonderland of crypto, lets not allow something basic like inflation do that, it's only a 3min read.
Understanding inflation alone won't guarantee you making money or a good investment but usually good projects have strong #tokenomics and inflation is mathematically calculated to sustain higher demand then supply in the market, resulting in prices going up.
What is inflation?
In economy Inflation is the decline of purchasing power of a given currency over time. If you substitute "currency" for a certain "cryptocurrency" you have the same, it's the decrease of purchasing power of your crypto. For example, #Bitcoin dropping in price purchases less dollars. To expand more, inflation in crypto is the new tokens coming out each day to the market and those new tokens can be potentially sold which represent selling pressure.
So, for Bitcoin we know that there are currently circulating 18,741,193 #BTC and that every new block (mined/created every 10minutes) generates 6.25 BTC which gives us 900 new bitcoins per day. At the time of writing this post bitcoin price is 34,000 USD, that gives us daily sell pressure of 30,600,000 $. Which means that to sustain those prices we need an equal demand coming in (buying pressure) or in other words we need new investors coming in to buy.
Inflation is measured in percentages (%). To calculate the daily inflation you need to know the cryptocurrency's current Total Circulating Supply and how many New Tokens/crypto will be generated/released daily into the market. To calculate it you need to divide New Tokens entering the market by current Total Circulating Supply and multiply by 100 (Total Circulating Supply / New Tokens) x 100 = inflation%. There you have your inflation crypto formula, you'll gonna need it! So again in Bitcoin's case we have Circulating Supply=18,741,193 BTC divide by New Tokens per day= 900 BTC and multiply by 100 we get 0.0048%. That's a very low inflation rate (just compare with those in the real world lol). Just a reminder max supply is different then circulating ( BTC max supply is 21 million, meaning how many BTC there ever will be).
Tip: As a general rule for new projects coming out inflation rate shouldn't surpass 2% daily (even 2% could be considered high sometimes), as for old and established projects inflation rate shouldn't surpass 200% yearly ( or approximately 0,55%, why yearly? that's for another day another post :P).
Final Words
Next time before investing in a cryptocurrency especially if you are going to #hodl long term (and some consider 3 months in crypto like 3 years hehe), find those info for your beloved crypto project first to be sure that the sell pressure will be reasonable and demand will sustain the prices.
You should have a good grasp at what inflation is by now and your precious hard-earned money can avoid a "deadly trap" and protect your capital. Focus on projects that have solid token metrics and a good inflation rate and you will be ahead of the curve. On the next post we gonna discuss what constitutes good #tokenomics. Have a great day and hope I helped even a bit.