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Munna & Guys > Blog > FinTech > Cryptocurrency: What is coin burning and why it should be a part of every investors calculus?

Cryptocurrency: What is coin burning and why it should be a part of every investors calculus?

August 30, 2023 FinTech

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. Burning coins involves taking them out of circulation and destroying them forever, permanently reducing the available supply of that token. The exact reasons for doing this can vary, from platforms that essentially program coin burns into their protocol, to crypto developers that simply want to see a price bump. 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.

Buybacks have proven to be an efficient method for steady growth. What better way to encourage the investors to HODL than to work on maintaining the price? Apple, Binance, and Nexo are leading the movement with their initiative in the field.

Burning crypto can increase its value as it reduces the overall supply of the cryptocurrency, creating scarcity and driving up demand for the remaining tokens. This can increase token value due to the basic economic principle of supply and demand. Since BNB and Binance’s launch in 2017, the company has committed to removing 100 million BNB, or half of the total supply, from circulation through a burning process. Periodic token burns are like a well-timed jab, keeping inflation in check and preserving the project’s and its investors’ long-term prospects. According to shiba burn tracker, roughly over a quarter million SHIB is burned every day.

PoB is somewhat similar to proof-of-stake (PoS), in that miners have to give away a portion of their holding. The cryptocurrency exchange Binance employs this burn of BNB tokens every quarter. All told, the process of burning crypto can be a bit confusing on its face. If you’re interested in getting into the game, however, it’s a necessary https://www.xcritical.in/ one to understand when investing in certain assets. Sometimes burning crypto has little or no impact on a token’s value, and scammers have often used masked burning events to attempt to steal crypto from investors. In this, rather than return it to its original owners, it goes to those who lost it in unintentional transactions.

If the supply of tokens is high and the demand is low, the cryptocurrency price will likely fall. For example, algorithmic stablecoins burn a certain amount of their tokens to decrease the supply and stabilize prices to prevent this from happening. The Terra project, for example, burned 88.7 million of its LUNA tokens in November 2021.

In addition to obtaining mining rights for new blocks, burning tokens can (as mentioned) help preserve the value of an asset. Coin burning on its own doesn’t tell you whether a cryptocurrency is a good investment. By knowing how coin burning works, you can better understand the cryptocurrencies that use it. Burning crypto involves destroying a project’s tokens or coins, by sending them to a burn address.

What Does “Burning Crypto” Mean?

While some view burnings with a skeptical eye, there’s no arguing that this strategy has become more popular — particularly for new crypto that launch with a big supply. The auto-burn formula automatically calculates the number of tokens to be removed, ensuring an independently auditable and objective process separate from the Binance https://www.xcritical.in/blog/what-does-burning-crypto-mean-cryptocurrency-burning-definition/ centralized exchange. Additionally, BNB Chain continues to burn some of BNB Chain’s gas fees in real-time. You will notice that the last four letters of the ciphertext end with “dEaD.” This is not a coincidence. The aforementioned null address is also a vanity address, which means that the creator specifically chose those parameters.

  • In all these cases, the burned tokens are permanently removed from the cryptocurrency’s supply, and are inaccessible to anyone.
  • After erasing tokens from existence, there are two ways to proceed.
  • The wallet is outside the network, and the tokens can no longer be used.
  • The process is similar to demonetisation of currency or buy-back of shares.

SHIB holders will have to burn more tokens before the price changes significantly. In addition, you can receive passive income from burning through the Shiba Inu burning portal. So, you don’t have to wait for some far-off date to reap the benefits of burning your tokens.

As you often see in cryptocurrency, it has been copied almost endlessly since then. The Shiba Inu project has a strong community of supporters, and a coin-burning mechanism can help to engage and incentivize the community. By burning tokens, the project can demonstrate its commitment to the community and create a sense of shared ownership and responsibility for the project.

Proof-of-burn or burning of coins/tokens by sending them to an unspendable address is applied to different cryptocurrencies. This is purposely done to create an economic scarcity so that the token/coin HODLers benefit from it. Both the traditional and crypto markets are facing the dangerous effects of inflation. One of the most effective ways to combat the side effects is through token burn.

Permanent Removal of Assets

Which crypto sectors, tokens & brands are among the most popular hashtags on TikTok crypto? He has worked as a reporter on European oil markets since 2019 at Argus Media and his work has appeared in BreakerMag, MoneyWeek and The Sunday Times. Protocols that use proof of burn include Ripple, BitShares, Slimcoin, Counterparty and Factom. “This acts as an incentive to keep the network secure, as miners are rewarded with new coins for destroying their old ones.” Machikhin said.

How can you protect yourself from coin burn scams?

The smart contract will then verify that they have enough coins in their wallets and subsequently executes the burn. The smart contract will send tokens to a randomly generated address that’s inaccessible. At the market cap of bitcoin, 95% of SHIB’s initial total supply would have to be burned. Prof. Chebbi also said that the jury is still out there on the impact of the burn process on the cryptocurrency market.

Through burning, investors get to influence the price stability of the token, which means more investors tend to finance projects that are involved in token burning. Increased liquidity and HODLing perks are just some of the most relevant features that shareholders value in the long run. The loss of assets can be one disadvantage of coin burns, but there are several benefits as well. The main one being that, although somewhat artificially, it can control the price of a crypto-asset, stopping either extreme inflation or deflation of a coin’s price.

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