Cryptocurrency Inflation Rates

Crypto Inflation
INFLATION RATES
18.04.2019
INCREASES IN CIRCULATING SUPPLY OF TOP COINS
CHRISTIAN OTT
AUTHOR
Introduction
The circulating supply is a crucial factor in the price determination of a cryptocurrency. Once yet undistributed coins are moved into the circulating supply, they become tradeable and can be sold on the market. With some projects running low on funds after a year-long bear market, moving coins from the total supply into circulation and then selling them is an adequate method for these projects to gain more funding. Unfortunately, this will drive the price of a coin down, because the small demand doesn’t match the massive amount of coins being sold and the project might sell the coins at any price available. To my surprise, circulating supply increases are way less forecasted than prices, even though they can influence the price heavily. Therefore, I will take a closer look at the top coins’ circulating supply increases in this article.

Supply Inflation: Bitcoin
Let’s start with the biggest cryptocurrency. Bitcoin has been around for over 10 years now and shows, how the circulating supply inflation rate can decrease gradually over time. Starting with a very high inflation of 208% at the end of 2010 compared to the end of 2009, Bitcoin’s circulating supply inflation has decreased significantly over time. It went from a triple-digit percentage increase in 2010 to a double-digit percentage increase in 2011 and then down to a single-digit percentage increase in 2015. Currently, Bitcoin’s circulating supply inflation is projected to be at 3.76% in 2019 and will even further decrease in the upcoming years due to the block reward halving from 12.5 BTC per block to 6.25 BTC per block in 2020. Previous block reward halvings have occurred in 2012 and in 2016. The following graphic shows the percentage-wise inflation per year:
BITCOINCIRCULATING SUPPLY OVER TIME2010:208.29%2011:59.38%2012:32.61%2013:14.95%2014:12.09%2015:9.89%2016:6.96%2017:4.35%2018:4.05%2019:3.76%
Supply Inflation: Ethereum
Ether’s supply inflation is different to Bitcoin’s due to a certain amount of pre-mined tokens, that were sold in their ICO. I estimated, that they sold 63 million ETH in their ICO back in 2014 and declared the difference to the ETH in circulation at the end of 2015 as supply inflation for ETH for 2015, which is around 21%. Similar to Bitcoin though, the inflation rate decreased per year and has been in a single-digit percentage rate for the first time in 2018. Key influences to Ethereum’s supply inflation were two block reward reductions. The first one reduced the block reward from 5 ETH per block to 3 ETH per block in the Byzantium hard fork in late 2017, while the second one took place less than two months ago and reduced the block reward from 3 ETH to 2 ETH in the Constantinople hard fork. The following graphic shows how Ether’s circulating supply inflation rate increased over time:
ETHEREUMCIRCULATING SUPPLY OVER TIME2015:20.90%2016:14.87%2017:10.54%2018:7.68%2019:4.85%
Supply Inflation: TOP 25
Bitcoin’s and Ethereum’s circulating supply inflation look healthy and organic. The longer both networks have been live, the lower is the inflation rate of their circulating supply. Let’s take that as a reference and take a look at the circulating supply inflation of other coins and tokens. I made a snapshot of today’s CoinMarketCap top 25 and analyzed their inflation rate per year. By using CoinMarketCap’s historical data tab, I could calculate the circulating supply of every coin/token at a given point in time by dividing the daily market cap by its daily closing price. 6 coins/tokens were excluded from that analysis, because they didn’t have market cap data in at least 3 different years. The resulting graphic displays the inflation rate per year for 17 coins/tokens (Bitcoin and Ethereum have already been displayed in the sections above):
TOP 25CIRCULATING SUPPLY OVER TIME2018:22.17%BASICATTENTIONTOKEN2017:2018:88.43%762.88%ZCASH2017:2018:8.47%12.75%ETHEREUMCLASSIC2016:2017:2018:0.00%0.00%0.00%NEM2017:2018:0.00%30.00%NEO2018:0.00%IOTA2015:2016:2017:2018:8.73%12.35%14.41%22.12%DASH2015:2016:2017:2018:7.33%13.76%29.49%92.51%MONERO2018:0.00%CARDANO2018:1.35%TRON2015:2016:2017:2018:7.29%158.02%43.05%36.03%STELLAR2016:2017:2018:36.06%13,678.07%945.78%TETHER2018:32.27%BINANCE COIN2012:2013:2014:2015:2016:2017:2018:9.67%11.05%12.05%24.56%43.99%80.07%357.60%LITECOIN2018:57.45%EOS2018:3.87%BITCOIN CASH2014:2015:2016:2017:2018:5.28%6.64%8.34%8.27%296.24%XRP
As the data shows, inflation rates are highly different across these 17 coins and tokens. Some of them have very small inflation rates (Tron, Bitcoin Cash), while some of them even have zero inflation into their circulating supply (ADA, NEM, IOTA). Others started with a very high inflation rate (Litecoin, Monero) but it then decreased over time. As a stable coin, Tether is an outlier in this dataset, since an increase of its circulating supply theoretically means that more tokens backed by fiat money are entering the crypto space (whether that might be true or not shall be discussed in different articles).

Discussing supply inflation in general
The circulating supply displayed for each coin/token is mostly defined by the projects themselves. Let’s say a project defines, that their total supply equals their circulating supply and therefore all coins have been distributed and are in circulation. It means, that there is no inflation currently and there will be no inflation in the future – a good sign for investors. However, it is tough to determine, whether or not a certain amount of the circulating supply has been held by the team from the start and is more or less not distributed and therefore shouldn’t count as a part of the circulating supply.

Furthermore, attracting investors with an inflation rate of zero is not the only incentive of declaring all coins in the total supply as circulating supply. The market cap of a project is calculated by its circulating supply times its current price. If a project declares, that all their coins are in circulation even though 50% of them haven’t been distributed originally, their market cap is 2x higher than it would be, if they will define their circulating supply correctly. Since the most common ranking method for cryptocurrencies is by market cap, a project can boost its placement in these rankings with this method.

Adding to that, I think it also important to distinguish between a planned inflation and a rather unplanned inflation. If a coin is mined for example, its mining rewards might be already determined for the next few years or even decades to come. Both the miners and the speculators know, how many coins will be released at which time and can act accordingly. When it comes to pre-mined tokens though, it can be hard to determine, when these tokens will be put into the circulating supply, especially if the vesting period is not scheduled via a smart contract. Events like a wallet getting hacked or a project running out of funds can lead to a massive dumping of these tokens on the market, which nobody could predict before.

However, a high inflation doesn’t matter so much, if there is a high demand. Bitcoin had a very high inflation rate of 208% in 2010 and 59% in 2011, but managed to go up from being basically worthless to 30 US Dollars in mid-2011. The Binance coin has also performed very well in 2018, even though 32% more coins were put into circulation in 2018, than there were in 2017. It has to be stated though, that most cryptocurrencies don’t have a very high demand and are just speculation objects, which leads to prices massively decreasing if a bigger amount of yet undistributed coins and tokens hits the market.

Wrap-up
Inflation of the circulating supply is a factor, that can have a fundamental influence to the price, even though it is not often considered in a price analysis. Bitcoin’s and Ethereum’s increases in circulating supply have been decreasing over time percentage-wise. Other coins have had various inflation rates, ranging from zero inflation to a very high inflation above 25%. Due to the circulating supply being determined mostly by the projects themselves, it can be also used to manipulate investors’ expectations and the project’s rating in rankings by market cap. This article showed, how different the increases in circulating supply are across all coins and tokens in CoinMarketCap’s top 25.



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