In determining the price of a cryptocurrency, the amount in supply is a crucial factor. Over the past year and a half, cryptocurrencies have gained prominence in daily news and investor attention. As a result, all cryptocurrencies’ total value increased by more than 3,000% in just 12 months.
For some underfunded projects, a sensible method would be to get coins from the general stock into circulation and then sell them so that the project can raise more funding. Unfortunately, this can lead to a fall in the coin price as low demand does not match a large number of coins being sold, and the project can sell coins at any available price.
Surprisingly, the increase in circulation supply less predictable than prices, although doing so can substantially impact prices. Below are the major cryptocurrencies and their inflation rates.
Bitcoin, the largest cryptocurrency, is often referred to as an inflation hedge because of its limited supply which is not influenced by its price. It is also due to their relative attractiveness when actual yields drop to zero or less.
Bitcoin has been around for over 11 years, and clear trends in supply inflation over the years are visible. Starting from very high inflation of 208% at the end of 2010 compared to the end of 2009, inflation from the circulating Bitcoin supply has decreased significantly over time. It goes from a three-digit percentage increase in 2010 to a double-digit percentage increase in 2011 and a single-digit percentage increase in 2015.
Bitcoin inflation has been known to decrease over time due to the halving of every 210,000 blocks and decreasing block reward. The previous share of block rewards occurred in 2012, 2016 and 2020 and reduced block rewards from 50 BTC to 25, 12.5 and currently 6.25BTC.
With the halving capturing the attention of most investors in the cryptocurrency space and some mainstream press, the changes at Ethereum have gone mostly unnoticed in the broader crypto community. While BTC has become an investment option for those seeking strong money principles in central bank balance sheet expansion, ETH also represents strong money principles.
Unlike BTC, ETH does not have a fixed supply but still has a declining inflation rate. ETH sold specific amounts of pre-mined tokens in Ethereum’s ICO back in 2014. The estimate lies at around 63 million ETH. At the end of 2015, there was a difference of about 21%. There is a fixed issuance of new ETH annually. As the money supply grows, that limited issuance becomes a smaller portion of the total money supply.
Critical influences on Ethereum’s supply inflation were two block reward reductions. The first one reduced the block reward from 5 ETH per block to 3 ETH per block in the Byzantium hard fork in late 2017, while the second one took place in 2019 and reduced the block reward from 3 ETH to 2 ETH in the Constantinople hard fork.
Last year, XRP, the third-largest cryptocurrency by market value, experienced one of the worst performances of the ten largest cryptos, losing nearly half of its value at the time. It is now down 95% from its peak price in early 2018, which may be related to the multiplying circulating supply.
XRP started 2014 with a very high inflation rate of 296.25%. In 2015 it fell to 8.26%. Last year, in 2020, it dropped to 4.77%. According to Messari, XRP now has the highest inflation rate of any large-cap cryptocurrency – 20.5% per annum. Compared to last year, there are currently 20.5% more XRP in circulation.
The US Securities and Exchange Commission is suing both the founder and current CEO of technology company Ripple for raising more than $ 1.3 billion after selling XRP through an “unregistered securities offering”. The suit alleges that cryptocurrency is a security, not currency.
Within a month, major exchanges such as Binance US and Coinbase delisted XRP, so the price went down.
Most consumers are speculators who view all coins’ value in circulation in terms of market capitalization rather than the amount of money. However, the average number of Litecoin transactions varies between tens of thousands, which means the cryptocurrency has a significant financial footprint.
Litecoin is likely Bitcoin’s closest rival when it comes to usage. Founder Charlie Lee has repeatedly said that people can use cryptocurrency for payments faster than bitcoin. Litecoin transactions take about two minutes, compared to the 300 minute average for Bitcoin.
The price of Litecoin has been very volatile over the years, resulting in significant price fluctuations from month to month. At first, inflation was very high but decreased over time. In 2012 it was at 357.60%, and in 2013 it became 80.07%. Last year it reached 3.85%, which is a significant decrease in inflation.
A given project mainly determines the specified circulation displayed for each coin/token. For example, design determines that total crypto supply is equal to circulation, and therefore, all coins are distributed and circulated. When there is no inflation now and no future inflation, it shows a good sign for investors.
However, it is difficult to determine whether some of the circulating capacity was maintained by the team from the start and was more or less undistributed and therefore not counted as part of the circulating capacity. Circulating supply inflation is one factor that can have a significant impact on prices, although it is not often taken into account in the price analysis.
The increase in Bitcoin and Ethereum in circulation decreased in percentage over time. Other coins have inflation rates that vary, from zero inflation to very high inflation above 25%. Since the project primarily determines the circulating supply, they can also manipulate investor expectations and project ratings in market capitalization ratings.