Bitcoin’s inflation rate will be lower than gold’s inflation rate next year, and other cryptocurrencies have changing inflation rates to watch.
It seems like every six months the subject of the “inflation rate,” or tokenization rate, of currencies comes up, and no one seems to care. 2021 and 2022 were years when the inflation rate was unbelievable important, both in the real market and in the world of digital assets. In the broader macroeconomic context, inflation rates have determined the behavior of global banks for more than a year. An unchecked rising rate of inflation has prompted central banks like the US Federal Reserve to restrict access to capital and aim for controlled recessions to reign in inflation.
Ethereum has managed to achieve The Merge, causing its inflation rate to drop and sometimes turn it into negative when there is sufficient network transaction volume. Ethereum issuance rates have floated in the low single digits since The Merge; it is currently 0.03%. Without The Merge, ETH issuance would be nearly 4%.
Bitcoin halves its issuance rate for every 210,000 blocks mined, known in crypto as the halving. Some have linked the Bitcoin halving to massive crypto price spikes, though honestly, I have some skepticism and serious concerns about this whole mechanism.
But there’s a dark side to token inflation, the one that fueled the entire DeFi boom — it can render your assets worthless. Many DeFi projects were offering tens of thousands of percent yield to stake their token, which they could only do because they were doubling the token supply every few days or weeks. Although it’s not as clear and simple on the open market, and it doesn’t happen immediately, when the number of tokens doubles the price per token, it is halved.
These massive inflation rates have also been a problem for some L1s and have personally steered me away from long-term investments in chains I otherwise liked. For example, Solana’s show last year was floating around 26%. The growth rate required to make holding SOL a good bet is insane.
The buzz currently circulating about the issuance rate is related to Bitcoin. The next halving isn’t until 2024, but when it does, Bitcoin’s rate of issuance will be lower than the rate of additional gold entering the market. This is quite a remarkable threshold, as Bitcoin has long been compared to gold. My concern about Bitcoin issuance comes from the miner side. Miners are already completely crushed from continuing their operations due to the falling price of Bitcoin – if the rate of BTC they get per half block successfully mined, they all go broke.
This has been a concern for Bitcoin from the start. Bitcoin maximalists will tell you that it doesn’t matter because individuals will take the loss of Bitcoin mining home because they want to support the network. This seems like a bad plan if your goal is to make Bitcoin a reserve currency for nations.