It is impossible to discuss cryptocurrency without understanding inflation.
It is a simple concept that causes massive confusion. Even politicians with fiscal responsibility can be heard mailing huge gaffes in public.
There are two ways of viewing inflation that are two sides of the same coin and hence the problem for many.
The definition . Inflation is a situation whereby a currency is able to purchase less value (goods and services) than it previously did.
That’s it in a nutshell.
One common explanation
Demand once it begins to grow and everything moves in cycles, can become greater than the supply of a god or of goods and then the producers put their price up thus taking advantage of the demand, That is the basis of free markets. Now your currency is able to buy less and hence you have inflation.
It is worth noting that the same effect can be caused by the cost of making a good rising as by demand for it rising, both cause the price to increase and as the market rebalances itself the currency is revalued.
The other common explanation
Five pals sit down in the casino to play poker and place £100 each in the poker bank in return for 1000 chips. An hour later the guy who happens to be their boss has lost all his chips. They don’t want him to go home unhappy so they say he can borrow another 1000 chips without putting money in and when he wins it back he can put the 1000 chips back in the bank and all will be well. The game ends and he has lost the extra chips too. Now they have £500 and 6000 chips to cash in. That values each chip at not 10p as before but 1/6 or 8.33p.
A player asks the waitress for a coffee and offers to pay in chips, she now adjusts the price of the coffee from £2.00 (20 chips) to 24 chips
Both explanations are accurate and both describe the same thing just form a different viewpoint.
Beyond the scope of this discussion is the relationship between inflation in an economy and the value of the currency in relation to other currencies. This is where the rubber truly meets the road and worth further reading.
This may seem off topic for a techncial series, but it was impossible to explain crypto currency without touching on currency and inflation.
The “Explained series” is planned to build into a trustworthy collection of explanations and commentaries that can be trusted to tell the story straight without any bias and attempt to make the subjects accessible to the layman. The latter is not always easy as some of these terms refer to genuinely complex subject matter, while others are simply too vague to pin down (there’s another word for that).
If you want an answer on something and you can’t find it easily, please use the comments section to just ask and I will appreciate not having to research the next topic.