Does Inflation Determine Price?

This argument seems to be popping up all the time

In my recent post about HIVE/BTC in which I argued for a bullish near term reversal and breakout for Hive in relation to BTC (and USD essentially), I received a comment from @lighteye that I want to address here. It's a position which I have often encountered over the years and while it makes sense at first, it is not as straight forward as one might think.

First, the comment that sparked the conversation:

But there is change in the air. Important trend lines arebeing broken and with around 1 year left for the bull phase I am going to cal it: Hive is going to make a strong reversal.

No, it won’t @tobetada. I like your optimism, but that will never happen because of one simple fact: Hive is inflationary currency, and Bitcoin is deflationary currency,. It’s a simple truth.
...
Well, if you don’t understand simple math, or the concept of deflation and inflation, I can’t help you...

In other words, the core idea is that inflation systematically erodes the purchasing power of currencies or assets, occurring when the supply expands disproportionately, effectively diluting the value of each individual unit while the underlying demand remains relatively constant.

So what's the problem?

I am not arguing against "simple math" (applied in a social context); it makes sense that when there is more of something, it should become less valuable - but here is the catch - if demand overall stays equal.

My simple argument is this:

The demand far outweighs the relevance of inflation (when it is kept at reasonable levels).

Inflation for Hive

When we look at Hive, @dalz gives us a very nice overview of what inflation we have seen over the years. Overall Hive's inflation actually shrinks by around 0.2% every year and is projected to be at around 6% for 2024. It will be only around 2% in 10 years! In reality, however, Hive's inflation varies (you can read more about why in the post).

Overall, we can see that Hive is now pretty much exactly at the projected amount and has remained under it for the majority in the last 4 years (due to the bull market in 2021).

In my opinion this is a very healthy development and there is simply no cause for alarm. In fact, our inflation is actually deflationary as it is being reduced every year. I would even argue that it could be too low in the coming years. This is actually another argument about the pros of inflation: In brief, it is the idea that inflation distributes coins to a broader user base that in turn increases network activity, thereby increasing demand and price.

Demand for Hive

The best metric highlighting demand is probably price. If demand is high, price will go up and if demand is low it will generally go down. It is of course not quite that simple as we have whales manipulating price to their interests and the effects of high demand might be mitigates by the fact that Hive's design is feeless in nature, i.e. one can use the blockchain to a relatively high degree without having to buy more Hive. We also have many speculators that are essentially only interested about the price and not the project; the demand is therefore artificial.

Inflation < (artificial) Demand

When inflation is kept reasonable, demand far outweighs the effects of inflation on price. Arguing that a coin or token can not "make a reversal" or is "doomed to stay at low prices" in light of inflation not only seems questionable and is provably false when we look at the data. Take 2021, for example. Hive made a 34x in under a year when inflation was projected to be at around 7.5%. If the argument by @lighteye were correct, we should have never seen such a reversal and Hive should have apparently stayed at 10 cents (?). Clearly, market cycles are more relevant.

Conclusion

To answer the question of the post: yes, inflation does generally affect price, but it does not determine it, since we also have to look at the demand side of things (which can be artificially inflated) and has a much greater weight for price development.

Hive's deflationary inflation means that it will become increasingly harder to earn Hive making it perhaps even scarce as adoption continues. We already have the web3 killer dapps that everyone seemingly wants and I am confident that this amongst other facotrs will be reflected in price appreciation in the near future.

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