How does the monetary supply affect cryptocurrencies?

Description: Cointelegraph analyst and writer Marcel Pechman explains how the monetary supply affects cryptocurrencies.

Summary: Cointelegraph analyst and writer Marcel Pechman dives into one of the key principles among cryptocurrencies: the monetary supply. This is an important factor as it explains how the cryptocurrency responds to certain economic events and the economic environment around it. According to Marcel, the monetary supply of a cryptocurrency is determined by its “block time”, or the time it takes for blocks of transactions to be added to the public distributed ledger technology. As with fiat money, if a coin experiences an inflationary period, its value drops as more coins are created and more coins enter circulation. If a coin experiences a deflationary period, its value increases as fewer coins are created and fewer coins enter circulation.

In the same way, the cryptocurrency market is also influenced by macroeconomic factors. For example, when the U.S. Federal Reserve launched its quantitative easing program in 2020, it initially caused a lot of uncertainty in the cryptocurrency market. Some coins experienced a sharp rise in their prices, while others experienced a sharp decrease. This is because the U.S. dollar’s value decreased as new money was created and this new money sometimes found its way into the cryptocurrency market. Similarly, if a country experiences a currency crisis and its currency’s value drops, some of its citizens may withdraw money from the local banking sector and invest in cryptocurrencies instead. This can create a wave of speculation as investors try to capitalize on the opportunity presented by the currency’s low value.

Thus, it is important to consider the monetary supply of a cryptocurrency when investing. It is also important to recognize that the economic environment in the cryptocurrency world is still relatively new and that its influence is still developing. As with any other financial market, it is always prudent to diversify investments, diversifying into fiat currencies, cryptocurrencies and other assets. As crypto investors get more experienced and more familiar with the idea of macroeconomic events impacting the cryptocurrency market, the effects of monetary supply will become more visible and more important.

Categories: Fiat Money