What Is Deflation?

Deflation is a decline in prices of goods and services, usually accompanied by the contraction of monetary and credit supply. However, this is not always the case. For example, electronics get cheaper over time because of advancements in technology, productivity, and automation rather than as a result of artificial monetary expansion.

Deflation in Cryptocurrency

In cryptocurrency, deflation is often used to describe an asset that is diminished by nature. For example, if 100 million units of an asset were created, but a built-in burn mechanism periodically lowers the overall supply of the asset, this asset is considered deflationary, as less of it remains in existence over time.

Mainstream Examples

Amongst the top cryptocurrencies, Bitcoin is currently not deflationary. However, upon reaching its supply cap of 21 million, it will turn deflationary due to irrevocably lost tokens, as users lose access to their wallets and misplace their tokens, essentially removing them from circulation altogether.

Ether started as a purely inflationary coin, but has since implemented measures like a burn mechanism, which has made the coin deflationary due to more burning of coins than created.

Key Takeaway

Deflation — the opposite of inflation — is a decline in prices of goods and services.

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