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 making huge gaffes in public, though often that is deliberate. Ill return to this.
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. What a non-economist sees however, is cost of goods going up continuously. Naturally the two are connected, though not s tightly as they’d have you believe.
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 good 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 reason we are often misled by central bankers and politicians is that other issues like wars and trade wars can cause a sudden loss of faith in a specific currency. The immediate defensive move is to quickly raise interest rates to discourage traders from selling the currency in volume and causing a run on the currency. They dont like to tell us the truth about their nefarious doings so they pretend to be watching inflation.
Note:
This may seem off topic for a technical 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). There is also a limit to how far I can go in explaining every term when there are a lot of them, so I have to sometimes rely on your initiative to right click the offending word and look it up.
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.