Deflation

Deflation simply means the decrease in the price levels of goods in traditional finance. However, deflation refers to the decrease in the market or maximum supply of a particular coin in cryptocurrency literature. There are a lot of coins that use finite supply. For example, one of the most popular limited supply coins is Bitcoin. The amount available to the market will always decrease since there will be only 21 million Bitcoins. Furthermore, other big projects such as Ethereum and Binance use deflation mechanisms in their cryptocurrencies for various reasons.

The reasons for the deflation of cryptocurrencies

• Finite supply: As stated before, the deflation in cryptocurrency generally depends on the limited supply of the coin. Some economists state that it is an advantage because the finite supply means that only a decided number of coins will be available. Therefore, the value will increase in the future years. These types of coins are deflationary by default since they are only a limited amount of them.
• Deflationary tokens: In these types of tokens, platforms burn their supply of tokens in different ways, such as buyback or transaction burning. Burning tokens decrease the total supply and increase their value due to the supply and demand relationship.
• Lost accounts: A coin’s deflation can also happen because of the lost private accounts. These accounts which are not reachable have coins in them that can not be sold or transferred.

Benefits of deflation of a cryptocurrency

• The first benefit is the increasing value. The decreased supplies attract more traders since they are rarer, and in the future, the price of the coin will increase because of the limited amounts.
• The other benefit of deflation is that platforms use deflating mechanisms to dispose of unsold coins. This process is advantageous for the project if unsold coins are not beneficial to circulate in the economy of the specific cryptocurrency.

Learn more about cryptocurrencies.