It is almost impossible to maintain a constant price of a cryptocurrency in the long run without being tied to a real asset. Since this is not the case for most coins and tokens, price drops in the market are standard. But there are ways how the supply of cryptocurrencies in the market decreases. One such method is known as burning. Let’s talk about what does burning crypto mean.
What is cryptocurrency burning?
Burning a cryptocurrency means permanently removing a certain number of tokens from circulation. It’s usually done by transferring the tokens in question to a burn address, i.e., a wallet, from which they may never be retrieved. Experts describe this process as destroying tokens.
The project burns its tokens to reduce the total supply. In other words, this creates a «deflationary» event. The motivation is always to increase the value of the remaining tokens, as assets tend to rise once the circulating supply drops and becomes more scarce.
Burning tokens can be like a company buying back its shares. In such a way, the company «returns a value» to its shareholders. Crypto projects burn their tokens to achieve the same goal. Anyone who owns cryptocurrencies may burn it, but it’s worth weighing the pros and cons first as you throw money away.
The price of a token does not necessarily increase overnight when a burn occurs. Sometimes other news about a token may outweigh the impact.
The main reasons for coin burning
When we figure out what does burning crypto mean, it’s time to find out why it is needed. Removing an asset from circulation to adjust availability and cost is not new. For example, the central banks of different countries regulate the amount of currency in circulation to control the purchasing power of that currency. There are several other practical reasons for cryptocurrency burning.
Proof-of-Burn (PoB) is a consensus mechanism that verifies and confirms a transaction. This algorithm allows miners to burn coins without wasting energy efficiently. If necessary, the PoB can be verified using the blockchain explorer.
PoB has several practical applications. It is mainly used to prevent fraud by automatically verifying every transaction. It also supports the ability of miners to mine new coins, as some cryptocurrencies require miners to burn coins first to mine new blocks.
One of the main benefits of coin burning is its impact on the value of a cryptocurrency. For several reasons, the average price per coin may increase after a significant burn. The goal of burning tokens is to reduce the overall supply of cryptocurrencies, thereby increasing demand. Theoretically, the price will rise if the demand is high and the supply of tokens is low.
Another potential reason for coin prices to rise after a burn is publicity. Often, an investor intentionally burns a large portion of the tokens in circulation and publishes information on social networks. It can help increase cryptocurrency awareness, boost demand, and increase the price per token.
Mining balance promotion
Maintaining network efficiency may be difficult. Every time a new token is created, the mining speed decreases. It gives many early miners an unfair advantage over new users. Burning tokens give miners the right to mine new tokens. Instead of burning one token the first time you start mining, the process is distributed and therefore more proportionate.
In some cases, miners do not need to burn the same token they are mining. Since proof of burn is configurable, networks can offer various rewards to miners. It encourages healthy networking.
Advantages and disadvantages of crypto burning
People don’t want to destroy assets without a purpose. While eliminating coins and tokens may seem counterproductive, burning cryptocurrencies has several benefits. In addition to obtaining mining rights for new blocks, burning tokens can (as mentioned) help preserve the value of an asset.
- Maintaining the coins’ value for investors: burning tokens is to stabilize prices and increase investor confidence. When demand remains stable, a decrease in the total available supply of a coin can lead to higher prices. By burning cryptocurrency regularly or with every transaction, many altcoins can steadily increase demand over time.
- Strengthening crypto communities: some of the most popular altcoins have large communities behind them. Successful blockchain projects are usually promoted by a few people and are actively used by numerous investors. Major community token burn initiatives can inspire others to invest or participate in the project.
But the procedure also has some disadvantages. To burn tokens, you first need to own the tokens. Once the token burn is complete, the tokens are permanently removed from your wallet. It means you no longer own those assets, even if the token’s price subsequently skyrockets. With some coins worth much less than a penny, this may lead to regrets later on, especially if you burned thousands at a time.
While there is no guarantee burning coins will increase a cryptocurrency’s value, it may be a valuable tool to help maintain weight and encourage investors. If you plan to invest in a cryptocurrency or other ICO in 2022, find out what does burning crypto mean to see if such a procedure fits your goals. Whether you plan to burn coins manually or use a currency that automatically burns some of its supply, ensure you always have a clear idea of what you are investing in.