If you’re interested in investing in cryptocurrency, you know that getting started isn’t easy. There are so many cryptocurrencies to choose from, and not all of them are on the up and up. So how do you pick which to buy?
In general, it is better to buy deflationary cryptocurrencies, rather than those whose value may be inflated as fiat currency is. But this isn’t always the case, and there are some decent cryptocurrencies that are inflationary.
Read on to learn more about deflationary cryptocurrencies as well as some general informal investing advice for investing in them.
What Are Deflationary Cryptocurrencies?
A deflationary cryptocurrency is a digital currency that continues to grow in value the longer it is around. This is usually due to supply adjustment, namely a supply that is increasingly diminishing. The decrease in supply creates an increase in value over time.
Cryptocurrencies can generate a decreasing supply either by using a burning mechanism, which permanently removes some cryptocurrency from circulation, or by having block limits that only allow a certain number of blocks to be added to the cryptocurrency.
The most famous deflationary cryptocurrency is Bitcoin, which has a block limit. This block limit means that only a certain number of Bitcoins will ever be created before the process stops and as this limit draws nearer, it will become increasingly difficult to perform.
Are Deflationary Cryptocurrencies Good?
While it does sound safe to invest in a currency that won’t inflate, whether or not you should invest in a deflationary cryptocurrency depends on your investment goals and risk tolerance.
Deflationary coins, just like any cryptocurrency, are extremely volatile. But, unlike other cryptocurrencies, they do favor long-term investments. This is because deflationary cryptocurrencies increase in value over time because they become more scarce.
Just because these coins increase in value over time doesn’t mean they are a good investment, in fact, there are many deflationary cryptocurrencies that have gone defunct, or crashed, despite their deflationary aspects. They are also subject to changing government regulations which can make a currency obsolete overnight just like inflationary cryptocurrencies are.
The only reason deflationary cryptocurrencies are advised to new investors is because they don’t require the quick action that inflationary cryptocurrencies require. They are more long-term investments and give you time to learn the market before a decision must be made.
Regardless, investing in a deflationary cryptocurrency can still lose your entire investment, just like any other cryptocurrency investment. So, you need to proceed with caution and ensure you understand the cryptocurrency entirely before investing.
The Best Deflationary Cryptocurrencies
If you think a deflationary cryptocurrency might be the best choice for you, below is a list of the coins we believe are the best deflationary cryptocurrencies to purchase.
The most famous deflationary cryptocurrency is also the most famous cryptocurrency, Bitcoin. This currency has a limited supply of blocks that can be created, making it deflationary over time.
Bitcoin is still volatile and subject to numerous external factors which affect its price, but it is widely adopted, making it a slightly safer investment than other cryptocurrencies on this list.
It should come as no surprise that the second most popular cryptocurrency is also deflationary. What’s interesting about ETH however is that it doesn’t use a limited supply to keep the coin deflationary.
Rather, it uses a burning protocol known as EIP-1559 which burns part of each transaction fee paid on the network in order to keep the currency deflationary. This is a newer protocol, and it was not implemented until the blockchain switched over to a proof of stake consensus mechanism a few years back.
While this burning procedure does keep Ethereum deflationary, it does make it hard to predict how deflationary as ETH is only removed from circulation when a transaction is made. This means any sudden increase or decrease in transactions would change how deflationary the currency is.
Despite this variability, because of its widespread uses and adaptions, Ethereum is considered a decently safe cryptocurrency for new investors.
3. Binance Coin
Binance Coin (BNB) is the native token of the exchange platform Binance. Users of the platform can buy the token and use it to make transactions on the site. BNB is deflationary because it has a limited supply of 170 million coins as well as regular burning procedures to take coins out of circulation.
While we like the redundancy in this currency’s deflationary mechanism, BNB isn’t necessarily considered investment grade because it is only really useful on the platform. But, if you are using the Binance platform yourself, purchasing some BNB can be useful in some cases.
ChainLink is a decentralized oracle network that allows real-world data to be ported over to the blockchain. Like Bitcoin, it has a limited supply of coins, but it also has an incentivization structure that encourages buyers to hold on to coins.
This means that those who choose to hold ChainLink for the long term may reap the rewards. But, while this project may be deflationary it isn’t yet as popular as Bitcoin or Ethereum, meaning the future of its volatility is uncertain.
Stellar or XLM is a decentralized blockchain platform that aims to be like Bitcoin as it provides a means of transferring value across borders. Stellar does not have a fixed ceiling like Bitcoin or ChainLink as it does increase its supply at a rate of 1% per year, but this rate can be changed in the future with network consensus.
Instead, Stellar controls supply using a fee-burning mechanism like Ethereum. Coins that are to be burned are sent to an address without a known private key where they will remain for the rest of eternity keeping this currency deflationary, but not as deflationary as others on this list. Stellar is considered a riskier investment than Bitcoin or Ethereum.
Overall, if you are looking to invest in a deflationary cryptocurrency, any of the coins on this list are probably a good place to start. Just remember that a coin being deflationary does not mean it is risk-free, and you are still liable to lose your entire investment. Therefore, only invest money you are prepared to lose.
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