Better than Bitcoin? Can cryptocurrencies beat inflation?

Abstract

Unlike Central banks, cryptocurrencies can easily adjust their inflation rate with simple changes to code. Bitcoin, with a finite eventual supply of tokens, is increasingly gaining acceptance as an alternative long-term digital store of value with similar anti-inflationary characteristics to gold. However, recent innovations on the Ethereum blockchain have shown that it is possible for cryptocurrencies to become deflationary ¬– specifically through the destruction of transaction fees. With up to half of the networks blocks destroying more Ethereum than is created, the notion that Bitcoin offers the best inflationary hedge among the cryptocurrencies is increasingly coming under threat. Such protocol improvements could pave the way for more cryptocurrencies to improve their anti-inflationary characteristics, becoming better stores of value than Bitcoin.

Keywords: Bitcoin, Ethereum, cryptocurrency, deflationary, gold, inflation

JEL Classification: E31 G18 O31 O32 O33