Back in the mainstream finance world central banks control the money supply. They can, and do, print millions in new currency.

In fact, the global financial crisis which immediately preceded Bitcoin’s creation produced the first major quantitative easing project in Western political history.

In November 2008 the US Federal Reserve took the extraordinary step of injecting $800m into the country’s flagging economy by printing new bills.

Across the Atlantic, governments followed. In March 2009 the Bank of England cut borrowing costs to the lowest level in its 300-year history and started buying up government bonds.

As more dollars and pounds chased the same amount of goods, consumers suffered significant price inflation.

In September 2011 the UK’s CPI, which tracks the cost of consumer goods, hit an unprecedented high of 5.2%.

Inflation, which cuts the purchasing power of money over time, is at its most basic level an excess of money supply.

Hayek’s theory

In 1976 Nobel laureate Friedrich Hayek proposed a system of many competing privately-issued currencies.

The Nakamoto Institute hosts a free-to-read copy of Hayek’s book, ‘Denationalisation of Money’, which is well worth an afternoon of your time.

His idea would upend not hundreds but thousands of years of monetary policy. Namely, that governments should not have the exclusive right of supplying money. Why? They are not particularly good at controlling inflation.

“It has the defects of all monopolies,” writes Hayek.

“One must use their product even if it is unsatisfactory, and above all, it prevents the discovery of better methods of satisfying a need for which a monopolist has no incentive.”

He goes on: “[T]he task of preventing inflation has always seemed to me to be of the greatest importance, not only because of the harm and suffering major inflations cause, but also because...even mild inflations ultimately produce the recurring depressions and unemployment which have been a justified grievance against the free enterprise system and must be prevented if a free society is to survive.

“I now have no doubt that private enterprise, if it had not been prevented by government, could and would long ago have provided the public with a choice of currencies, and those that prevailed in the competition would have been essentially stable in value and would have prevented both excessive stimulation of investment and the subsequent periods of contraction.”

One might argue that a relatively stable currency like XRP, which has seen much lower price volatility than BTC since its inception, might be one that prevails.

Hayek’s central argument is still true today: money is no different to any other commodity and is better supplied by competition than by monopoly.

Block rewards

Bitcoin deals with price inflation by cutting in half the amount of BTC miners get as a reward approximately every four years.

When Satoshi Nakamoto first proposed his revolutionary cryptocurrency in 2009, the reward for every block of transactions successfully added to the blockchain was 50 BTC.

In 2012, that fell to 25 BTC. 2016 saw the level drop to 12.5 BTC. Sometime in 2020, the next planned halving will cut the block reward to 6.25 BTC.

Ethereum and other major cryptocurrencies work the same way.

Vitalik Buterin explained in 2018 that moving to Proof of Stake would make ETH much more scarce, cutting inflation from 5% to a much more reasonable 0.5%.

And so, the ETH block reward dropped 33% from 3 ETH to 2 ETH in the recent Constantinople hard fork.

There is a very good discussion of supply versus inflation in Ethereum and Bitcoin here, if you want to read more.

Ethereum supply vs inflation

Bitcoin supply vs inflation

Inflation bugs

Sometimes cryptocurrency price inflation is not a result of speculation but instead a function of failings in their code.

Privacy-focused blockchain Zcash is a reliable top-10 crypto. But last year engineers discovered a software bug that could have allowed attackers to mint infinite tokens. Without a fixed, inelastic money supply, cryptocurrencies are not deflationary.

According to recent research, 60% of BTC full nodes could also be vulnerable to an unpatched inflation bug where miners could fraudulently boost the amount of Bitcoin by double input.

Bug bounty programs for the world’s largest cryptocurrencies like Ethereum are becoming much more common.

White-hat hackers received over $800,000 in 2018 for spotting flaws, helping cryptocurrencies to paper over cracks in their critical architecture.

TL;DR

Are cryptocurrencies inflation-proof? No.

But they are transparent about the source of their inflation and at least attempt to improve the issue by streamlining their structure.

In this way they differ from governments prone to hiding deficits or pumping shaky economies full of cheap cash, causing cycles of boom and bust.