How to correctly compose an investment portfolio? What are the typical mistakes when balancing a portfolio? Last time, we discussed in detail the crypto contagion effect and how to take this danger into account in the risk management of your crypto investments.
This time, let’s discuss another important aspect: the different economic nature of crypto assets. What exactly makes them really different? Inflationary crypto assets, for example, have the properties of regular fiat money and are poorly suited for long-term investing. But how do you distinguish between inflationary and true deflationary coins? What’s the difference between them? And how do you properly balance your portfolio?
Some cryptocurrencies are inflationary because their supply increases over time. Such cryptocurrencies use a combination of pre-programmed emission and token distribution mechanisms (to maintain supply and motivate participation in the network). This usually puts negative pressure on the price of the asset, causing inflation.
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Here are two examples of inflationary assets:
The supply of coins in deflationary cryptocurrencies decreases over time. Various mechanisms are used to reduce the number of tokens in circulation, including:
An example of a hybrid option is BNB, which implements two mechanisms simultaneously and plans to reduce its supply by 50% over time:
Deflationary cryptocurrencies sometimes use other tools to reduce supply, such as halving. Every four years, halving reduces the reward for Bitcoin miners, gradually increasing the deficit of the asset in the market.
The limited supply of 21 million Bitcoins means that once all BTC are issued, no more can be issued. While mass acceptance and proportional demand for Bitcoin continue to grow, its internal deflationary mechanism ensures long-term rate growth. That is why many experts are convinced that Bitcoin will remain inflation-proof due to its built-in internal mechanism.
Cryptocurrencies whose monetary model resembles (or even replicates) Bitcoin can also be classified as conditionally deflationary coins. These include Litecoin, Bitcoin Cash, Zcash, Dash, and others.
Let’s compare the two groups from an investor’s perspective:
In conclusion of this review, it should be noted that the line between inflationary and deflationary tokens is partly blurred; some projects change their tokenomics over time, moving from one group to another. Here are two examples from the real world:
Metaplanet, a publicly traded investment company in Japan, has incorporated Bitcoin as a reserve asset,…
Two Bitcoin wallets, dormant for over a decade, have suddenly transferred nearly all of their…
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BlockFi, the cryptocurrency lending firm, has announced it is shutting down its web platform as…
Jack Dorsey, co-founder of Twitter, has projected that Bitcoin's value will escalate to at least…
Tether, a leading stablecoin issuer, has openly criticized Deutsche Bank following a report by the…