This is an interesting concept to think about. Have you ever wondered by the "unlimited money printing" by central banks is going to lead to hyper-inflation, according to some, yet the same case is not made for cryptocurrency?
Of course, this is not true for everyone. Some Bitcoin Maximalists made the same accusation. They believe that Bitcoin is the only answer since it is deflationary, albeit ignoring all the historical flawed of fixed money systems.
Nevertheless, cryptocurrency does have the ability to "print money out of thin air" with absolutely no limit to the upside.
Source
Airdrops
Nothing gets people so excited in the crypto realm as the announcement of an airdrop. This is one thing that gets people's juices flowing. Why is this? Because it is free money of course.
Perhaps we should start calling the airdrops "helicopter money" because that is exactly what it is.
Here again, it is odd that people do not see the correlation.
Many have now termed inflation to mean the rise in prices. Essentially, it is the condition of too much money chasing too few goods and services. This causes prices to go up. Of course, the focus is always upon the demand and few ever look at the supply. Leaving that aside, we can easily see how with the ability to print money by anyone, that we will encounter a situation where there will be too much money for too few goods and services.
We simply cannot produce raw materials and physical products fast enough to offset the enormous surge in money that will come from cryptocurrency. Even if we leave the airdrops aside, which will not stop, we can see how the expansion rate of the existing currencies is exploding. All are operating on some kind of distribution system, pumping out more tokens, at most, every few minutes.
Ironic this is the scenario that people fear with fiat currency, leaving aside the fact this is not how central banks and quantitative easing operates.
Liquidity Crisis
Here we see a topic that is ignored in relation to this discussion. However a liquidity crisis caused by monetary policy is more fatal than inflation. This sets off deflationary trends that are impossible to reverse. Just take a look at what happened to Japan the last 25 years in terms of their deflation, albeit not derived from a lack of liquidity.
What cryptocurrency can do is to alleviate one of the biggest mistakes of the last 20 years: the USD liquidity crisis. Due to the fiscal and monetary policy of the United States, the global economy is lacking the Dollars necessary to maintain a healthy expansion rate. Hence, we have slowing growth rates all over the world.
This scenario was brought up on the latest Leofinance AMA regarding the LEO token. Even though this has over a 20% annual inflation rate, it was noted how there are not enough tokens available for all the different liquidity pools that are being established. In other words, as more use cases are presented, there simply is not enough free floating LEO for people to put their hands on.
But would this work across the board? While one project suffers from a lack of liquidity, could that happen within the entire realm. After all, this is the case with the USD.
As noted in Cryptocurrency: Ledger Monetary System Succeeded Years Ago, we already saw a multi-decade ledger system in place that could expand without a central bank and operated completely without oversight. Yet, today, the Eurodollar system is contracting due to a shortage of USD internationally.
Nevertheless, this does not create money in the same manner as cryptocurrency since it is still credit based. Hence, liquidity is not a problem yet inflation could be.
Massive Deflation
The reality is liquidity can become a problem, thus we need all the tokens we can get. People do not realize the era we are operating in and the event it has on this equation.
Simply put, we are in an exponential technological era. This is something that few can dispute. The explosion of technology is all around us.
What this means, by definition, is that we are also in a massive deflationary era&+. Technology is deflationary by its very nature. As it expands, costs are driven down unless there is some artificial barrier like a monopoly. Even in this situation, the impact is only delayed as the obstacle is worked around.
Looking at the balance between inflation-deflation, we can understand a lot of money is needed to offset the downward pressure due to technology. Some might believe that massive deflation is a good thing. Look at the Great Depression, a period of long term deflation, for reference of what life is like during that period. Not exactly a lot of expansion in most people's lives during that era.
Money is a tool of collaboration. This is basically the fuel for the economic engine. It is what enables all the new development we see taking place. Innovation has to come from somewhere. People want to be paid. Resources are bought. Prototypes build. Do people think this is possible without money? Where is all of this going to come from?
Of course, when this money goes into technological development, guess what it creates? More deflationary pressure. Therefore, we find ourselves on a continuous loop. The only way to stop it is to cease bringing technological innovations to market. Naturally, that would be very bad for society.
New Use Cases
The situation mentioned with Leofinance is not unique. In fact, it is already happening across the cryptocurrency industry. The reason why we will never see "too much money chasing too few goods and services" is because we keep expanding what is offered.
There is a saying in real estate, "you cannot create more land". Well, that is not the case.
Over the last few months, we saw plots of digital land go for millions of dollars. This is money that could be used for cars, boats, or homes which never made it to that realm. Instead, it remained in the digital, being spent basically on NFTs.
While the plots in that particular ecosystem are scarce, the totality of plots of digital land is unlimited. Each new game adding that feature has the potential to sop up even more cryptocurrency. Of course, that could be spent on the aforementioned physical items, or it could remain in the digital world buying more Bitcoin, Ethereum, or whatever people decide.
The point is we are seeing our digital options expanding exponentially. We already achieved a state where the opportunities exceed the resources each of us has. In short, we have more choices than we can choose from.
It is a situation that will only keep growing. This is not going to slow down. If anything, as more developers enter the industry, there will be more projects hitting the open market. All of these will enable us to get involved, providing another outlook for our monetary resources.
Thus, if one defines inflation as the increase in prices, we are not going to see this happen over the extended period. The expansion of technology in general, and in the digital realm in particular, is occurring such a rapid pace that trillions of dollars are required just to keep up. Throughout this decade, more than $100 trillion is going to be required to simply offset what is being generated by technology.
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Why has LEO has devalued that much then?...
Interesting, but from what I noticed the devaluation process has kind of begun since CUB was launched
It is the ebb and flow of markets. At this moment, LEO Is not bringing a lot of money in from the outside. However, think about how pLEO is going to be funded. Where is all that LEO going to come from?
The track record is that LEO goes on a run with each addition.
And by the way, a year ago LEO was under 10 cents so it is all perspective. You can look at pricing from the highs but are ignoring from the lows.
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pLEO comes from Polygon LEO?
Yes that is where it will be housed. However, it is still going to require people to move LEO onto that chain, the same as was done with bLEO (and wLEO before that).
Another use case that results in LEO being spread out even more.
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I put most of my LEO into CUB but I am glad for low prices because I can accumulate more LEO. Getting more involved with LeoFinance this past year has been incredibly educational.
I think that cryptocurrencies are helping against inflation!
Venezuela is a key example of how people used cryptocurrencies bought through the local.bitcoin exchange to save their purchasing power.
One more thing is that cryptocurrencies do not have a discretionary inflation while they may be with a decreasing inflation (Bitcoin), deflationary (Ethereum).
For my pockets and for my family's I consider Bitcoin as a digital Gold acting as a store of value.
The prices of virtual land is pretty insane. An Axie Infinity Genesis plot just went for $5 million bucks. I can only think that there is some serious money laundering going on the NFT space. Also, the decentralized metaverse is a force to be reckoned with. Stores, property, and assets existing in an intangible world is practically matrix-like.
I dont question the insanity of the prices. Personally, I feel there is a bubble-like situation forming. For this reason, we could see things reverse at some point in time.
Either way, whatever the price paid, it is sucking up a lot of money and will continue to do so. That means we are going to see more of them popping out.
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Fascinating... May I also add, that there will very likely be an increase in what is bought in the physical realm by those Cryptocurrencies? People never want to stop buying... If they have it, it burns a hole in their pockets.
Sadly, for most that is the case. The digital realm has a lot more potential for expansion though unless we start colonizing some new planets. If the whole metaverse grows and is being adopted that space travel might be put on the backburner though :-P
Why would the metaverse interfere with space travel?
Simple, why go out there and search for new stuff when you can create anything you want in the metaverse? Not saying it will halt it completely but I think it will get less attention when there's a lot to explore in the digital realm, mere speculation of course..
If we take that view, it will be so sad 😢
Are we going to give up discovery and exploration in favor of what we are able to create? I hope not! This has brought up a topic that I hadn't thought about.
!PIZZA
It's one of the possible dystopian-ish downsides of the metaverse.. if everything in the digital world will be better and almost perfect, many will not want to spend much time offline in the real world anymore..
This guy had some cool remarks on it:
Here in the U.S. inflation (rise in prices) is higher than it has been in a long, long time. There seems to be plenty of liquidity internally in the U.S. (for example, there is a record number of people paying in cash for new houses and the housing market is through the roof). There are supply problems too exacerbating the problem but there is huge demand. I expect liquidity of USD outside of the U.S. might have something to do with supply chain issues and the lack of U.S. dollars flowing out due to lack of available product (or the ability to get it here). There are a couple of things contributing to that including COVID policies and environmental policies (impacting ports in California significantly) but I think little of it has to do with monetary policy specifically.
Cryptocurrencies compete against one another so if we think of them as a product for a moment instead of just a currency then you have a limited number of dollars (or other fiat currency) chasing a rather large number of cryptos. As long as crypto mostly has to ultimately be traded for fiat to be used (either by the consumer or the person/business accepting it), I don't think it can cause a rise in prices of real goods and services. Within the crypto world itself, the ever increasing availability of new cryptos puts a downward pressure on the price/value of existing ones, but only to the extent that new crypto is ultimately successful. Whether "downward pressure" results in actual reduced value depends on whether and how much current and new investors are putting into crypto as a whole. Arguably, investment in crypto is on an overall rapidly rising trajectory that is nowhere near its peak. But that is speculative on my part. However, if accurate, that will offset any inflationary pressure (a drop in value of crypto relative to other good and services) for some time to come.
That is true although a significant portion of that is overseas money hunting for yield. Also I would say that is a lot of appearance since we know the hunt for yield is taking place. Money is flowing out of a lot of traditional realms such as fixed income seeking a better return. A case could be made that both equities and real estate benefit from this to some degree.
This is quite a presumption. It might be true but I think it very questionable that will remain the case. After all, while it is slow, we are starting to see more acceptance of crypto as payments. This is a trend that I believe will continue. Will it get to the point where it rivals the purchasing made in fiat currencies for real world goods and services? Maybe not.
However, what is to say that is the only realm affected. What about the payment on our Netflix or Pandora accounts, which operate in the digital? Price increases there due to the accepting of crypto payments (if they ever do) is very real to people.
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Actually I am currently looking into ( https://www.bitrefill.com/buy/?code=tll33sj6 ) where you can buy netflix and disney+ refill cards with crypto.
Maybe someday my hive snowball will grow enough to pay those monthly bills for me leaving more fiat money to buy more crypto to grow my snowball bigger and well ad infinate.
That's why I said "As long as...". I don't know that it will always be true but it is true right now and seems likely to be true for some time to come.
If Netflix were to start taking crypto as payment, then I assume they would do some kind of real-time conversion to USD for pricing. The USD and other big fiat currencies have their flaws but they are generally relatively stable. For a business to figure out how to price stuff in a dozen different cryptos, usd and whatever else is kind of impractical, especially with the volatility of crypto. The best they can really do is convert it to USD or something else that is stable for real-time pricing. Besides, they still have to pay their taxes in government fiat (at least for now). In other words, while they may accept crypto as payment, pricing is really still in dollars...you have to give them $20 worth of bitcoin/month (or whatever), not a constant 200 satoshis/month (or whatever).
If that is in fact what they do, then I think all the reasoning above still holds true. If they had been accepting bitcoin for the past 5 years then presumably the price in bitcoin would have actually seen a significant decline, not rise, despite all the crypto inflation (increase in supply) in general. Even Bitcoin itself is inflationary until the last one is mined. It's just that for the time being, demand is outpacing supply in the crypto world so value overall keeps rising over the long run. That can't be the case forever but if you can accurately predict when it stops being the case then you could probably make billions pretty easily.
What we have seen thus far, at least using the major cryptos like bitcoin, litecoin and ethereum as examples, is massive deflation (when using the typical pricing definition anyway). The same amount of any of those today can buy a lot more that it could a few years ago.
Crypto has really gone a long way in a positive situation in helping individuals in one way or the other and there is still improvement for it in the coming years with the aim of also a positive change in price which is most people on the blockchain desire to achieve and invest more in gaining.
Okay, you are going to laugh at me, but I have to be honest and say that inflation isn't really something that I pay too much attention to. I obviously understand the concept and all, but I don't really pay too much attention to it. If we need something we buy it and the price is the price. I mean yeah, it sucks if the price goes up, but there isn't much we can do about it. I know that is probably a totally first world attitude about it or a privileged bias or something.
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You are a rarity. For most, they notice when prices go up but do not pay attention to prices going down. For example, people remark how much they are paying for gas right now. Did they comment how cheap gas was getting after the last run up in oil to $120? With that we heard crickets.
So people have the negativity bias. During the early 2000s, my cell phone plan was $90 a month for 1,500 texts and 500 peak minutes (unlimited off peak). For much of this decade I pay $40 which also includes internet (which was not available before the smartphone).
How many people have the same experience (I would say most in the US) yet how often do you see people commenting their cell phone plans are less than half what they were 15 years ago while giving them a lot more service, time, and capabilities?
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Yeah, that is a good point. Gas is probably the one people notice the most. I do pay attention when it is lower because I have a truck with a 37 gallon tank so the swings I get from filling it up can be pretty big depending on the price. I think we see a lot of unit bias in gas prices too. Right now it is that $3 mark. Then I think about how that $.20 difference really only amounts to a couple dollars. Again, that is probably my first world mind thinking a few dollars isn't much.
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True. There is the bias in that also.
We see it in all areas of technology. People only notice the increase instead of how things went down.
Do you think most people really pay attention to the fact they were dropping $15 per CD for music 25 years ago and now it is essentially free?
That is just an example of how things change.
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The Expanse is coming.
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Interesting way to look at it.
Expansion has a cost though that increases as it expands. Think Compute resources, or disk space. This may limit the exponential growth of technology and balance the lack of money supply as users create extra digital resources.
Well airdrops are nice but having so many tokens but not enough liquidity to get out of them can also be a problem. Is there a point in having a coin that nobody buys? I don't really see any point in some of them like that. It's still supply and demand issues even in crypto.
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I find it completely interesting that the NFTs in Splinterlands can be bought and then rented out, or with some speculation bought, held, and resold for a profit. This is a real estate-like or style type of digital property even though those exact words have not been used.
For example, some Splinterlands cards have a much higher monetary value than the Land Plot Nfts.
Looking at the rapid value increase that might change in the near future lol
If crypto to achieve this much market cap in 10 years + I wonder how much it will be worth in the worth. Airdrops get me so worried because I always wondered where the money came from, how come am being given for free, whose pocket is it being paid from. I feel cryptocurrency will be bring inflation, but is it possible that everyone will be too rich from inflation to care?
Interesting, this is a point of view I have never thought about or had to bother about.
Fiat only has value if you have real economic activity behind it - like people providing goods and services to earn it. As soon as the supply of the fiat outweighs the economic activity backing it, you get inflation.
The same idea goes for crypto. Only the cryptos that have real economic activity behind them (people using them in games or on social media, for exmaple) will retain any value. Anyone can create a meme-coin that gets traded heavily due to marketing schemes on Tik Tok and the like, but if there's no long-term plan behind it, eventually the economic activity dies along with the value of the token.
Great shift of perspective for me personally. Never really thought about technology being either inflationary or deflationary.
I did however worry about everyone coming up with whatever new meme coin they feel like creating and basically the ability to create endless new digital money. The perspective from this article was much needed in that regard, thank you!
Really enjoying the crypto maniac podcasts on spotify too by the way.