Definition
Inflation is a process in which currencies such as the US dollar or euro lose value over time, leading to an increase in the prices of goods. Bitcoin (and some other cryptocurrencies) are designed to have a predictably low inflation rate.

One of the most attractive attributes of cryptocurrencies, especially Bitcoin, for investors is that they are more resistant to inflation than fiat currencies like the US dollar.

But what is inflation? Inflation is the process by which a currency loses value over time, causing the prices of consumer goods to rise. Since most economists believe that a certain level of inflation is beneficial for the economy. For example, over the decades, the US government has printed more money than consumers actually need. This is why a Coke that cost a few cents half a century ago now costs several dollars.

On the other hand, Bitcoin has generally appreciated in value much faster than the US dollar has depreciated—from being virtually worthless in 2010 to over $20,000 in late 2020. (Due to its volatile nature, Bitcoin has also experienced sharp fluctuations and declines, but overall, it has shown an upward trend over time.) This makes Bitcoin an increasingly popular hedge against inflation in fiat currencies.

The primary way Bitcoin resists inflation is through its limited and well-known supply, with the creation of new Bitcoin predictably decreasing over time. (There will only ever be 21 million Bitcoin, and the amount mined every four years will halve.)

Why is inflation important for cryptocurrencies?
High inflation rates in fiat currencies may lead individuals to invest more in digital currencies because the dollars or euros they deposit in savings accounts actually lose value over time. Bitcoin and certain other cryptocurrencies like Ethereum offer investors an alternative. The economic principles of the Bitcoin market are complex, but the cryptocurrency is designed with features that help it resist inflation.

Governments cannot manipulate Bitcoin by adjusting interest rates or printing more money to achieve policy goals.

Like gold and other scarce stores of value, the conventional wisdom around Bitcoin is that it should rise in value during uncertain times. (However, this is not always the case. For example, at the start of the COVID-19 pandemic, it followed the stock market in a sharp decline.) Compared to gold, Bitcoin is a more convenient way to store and transfer value, as it can simply be sent over the internet.

One of the key aspects of scarcity is the ability to establish a store of value that resists inflation. Bitcoin will never exceed 21 million coins. As of now, approximately 19 million Bitcoin have been mined. Roughly every ten minutes, miners process a new "block" and add 6.25 Bitcoin to the network. (In 2024, the mining reward will drop to 3.125 Bitcoin, and it will halve again every four years until all Bitcoin are mined. This mechanism, designed into the Bitcoin protocol, is called halving.)

Over time, as the new supply gradually diminishes, Bitcoin has a unique predictability. This differs from gold, as no new Bitcoin will ever be "mined" after the cap is reached.

Do cryptocurrencies experience inflation?
Yes, technically, even Bitcoin experiences inflation when mined (the same applies to gold). However, since the amount of new Bitcoin automatically decreases by 50% every four years, Bitcoin's inflation rate will also decline.

In practice, as long as Bitcoin's purchasing power continues to rise relative to the fiat currencies it is often compared to, its annual inflation rate of just a few percent is not a major concern for investors.

But not all cryptocurrencies are designed like Bitcoin. For example, a category of digital currencies called stablecoins, many of which are pegged to fiat currencies like the US dollar, has grown increasingly popular. These can be useful, low-volatility tools for saving money. However, if a stablecoin is pegged to a fiat currency, your investment will be subject to inflation and may gradually lose value as the reserve currency depreciates. (Some stablecoins offer rewards, which may alter the value equation, especially when non-crypto reward rates hover near zero.)