What does it mean to burn crypto? Explained

This reduces the supply, which theoretically acts to increase the currency’s price and benefit investors. Tokens are burned by sending them to a wallet address that can only receive tokens, but not send any. For example, some cryptocurrencies may conduct regular token burns monthly or quarterly. In contrast, others may only burn tokens in certain circumstances, such as when certain conditions are met, or a specific target is reached. Proof-of-burn (PoB) or Proof-of-work (PoW) is a consensus mechanism some coins use. This mechanism uses protocols that use multiple validators to approve a valid transaction.

By knowing how coin burning works, you can better understand the cryptocurrencies that use it. Developers can claim to burn tokens when they’re actually sending those tokens to a wallet they control. To avoid this, it’s important to do your research on the crypto you’re investing in or stick to safer cryptocurrency stocks. Burning coins involves taking them out of circulation and destroying them forever, permanently reducing the available supply of that token.

What Does Burning Crypto Mean? How & Why Is It Burned?

Furthermore, the act of burning is deeply rooted in the principles of blockchain technology. Every transaction, including token burns, is recorded on the blockchain. Anyone can verify the integrity of the burn by examining the blockchain ledger, ensuring that the stated number of tokens have indeed been removed from circulation. The illustration below is an example of an address for burning coins on Ethereum. If there are fewer coins in circulation and the demand exceeds the supply that can be provided, the price will most likely shoot up. It must be mentioned that coin burning is a method for cryptocurrency projects to evade securities regulations.

Removing an asset from circulation to adjust availability and value is not a new concept. For example, central banks adjust the amount of circulating currency to adjust that currency’s purchasing power. There are a few other practical reasons for burning cryptocurrency.

Is a coin burn good for investors?

Thus those coins are effectively locked up, and taken out of circulation. Cryptocurrency burning is the process in which users can remove tokens (also called coins) from circulation, which reduces the number of coins in use. The tokens are sent to a wallet address that cannot be used for transactions other than receiving the coins.

• There are several purposes for burning coins, and much of it is to do with the stability of a coin’s price or the coin itself, in the case of a crypto upgrade.
• By solving complex, computational math equations, they receive an allotted amount of Bitcoin, which halves every four years.
• BNB launched with 200,000,000 total supply, and will continue on its burn schedule until 100,000,000 coins are burned — or 50% of all BNB in circulation.
• On the other hand, burning cryptocurrency can help to increase its value.
• Coin burn is basically done to create a supply crunch, thereby creating an artificial upward pull for the token price.
• This is what it means when users or a community say they have decided to burn a particular cryptocurrency, or that they burned their coin.

ShibBurn was inspired by Ethereum creator Vitalik Buterin’s May 2021 $6.7 billion SHIB token burn. One is the same address Vitalik used to burn his SHIB holdings, another is the same one that is used for ShibaSwap listings. The last is the Ethereum genesis address, dubbed the “black hole” address. Typically participate in a service, such as streaming music or using a search engine. The one who provides the service may gain ad revenue and burn SHIB as a result. Accordingly, you can play games, listen to music, watch YouTube, or purchase merchandise to initiate SHIB token burning.

To Increase a Coin’s Value

This is typically done by transferring the tokens in question to a burn address, i.e. a wallet from which they cannot ever be retrieved. Publicly traded companies buy back stock to reduce the number of shares in circulation. In general, this practice is intended to increase the value of the shares while increasing the company’s financial performance. Unfortunately, it doesn’t always work as intended and sometimes has the opposite effect.

The immediate consequence of this action is a reduction in the total number of tokens in circulation. As the circulating supply diminishes, each remaining token’s relative scarcity increases. In cases where the developers have a genuine interest in the token, there is no guarantee that burning tokens will increase demand. It’s also worth noting that even successful crypto projects may still need a coin-burning mechanism. As a user, developer, or investor, understanding demand is crucial to gauging the value of a cryptocurrency. While burning coins does affect their supply, there must be enough buyers interested in the coin to increase its price.

Counterparty Risk

Crypto burns, also known as coin burnings, are when a project decides to take a certain number of coins out of circulation. •   Using proof-of-burn as a consensus mechanism is a low-energy way to validate transactions and create new coins, while keeping the supply in balance. The basic economic law of supply and demand dictates that if the supply of something decreases, then the price will have to rise, assuming demand remains constant.

Scarcity is a central economic concept that gives value to a particular asset and in this case, cryptocurrency. Unlike fiat currencies, cryptocurrencies are deflationary in nature. This means that the coin supply for most cryptocurrencies are fixed, with no additional coins created once it has reached its total supply count. The best example is Bitcoin, which has a fixed supply of only 21 million; if demand increases, prices would increase since there is a limited number of Bitcoin in circulation. Burning crypto has also developed as a low-energy way for blockchain projects to increase their security and stability.

Assessing the Future of Burning Crypto Coins

Generally speaking, restricting the supply of a cryptocurrency should lead to an increase in the value of the existing tokens as they become scarcer. As such, coin burns are typically considered positive and welcomed by token holders. However, not every coin burn leads to a price increase for the burned token. There is no evidence yet that burning cryptocurrency tokens increases the value of that specific cryptocurrency. The action can influence investor and user sentiment which would have more of an effect of driving prices up and down.