It is nearly impossible to keep the price of a cryptocurrency constant over the long term unless it is pegged to a real-world asset. Because this is not the case for most coins and tokens, price drops are quite common in the market. But there are ways through which the supply of a crypto can be intentionally increased. One of these methods is known as burning.
So how exactly does burning affect the price of a cryptocurrency?
What is cryptocurrency burning?
we have a more detailed article on coin burning if you’re looking for a detailed explanation of the process, but we’ll still quickly recap what it’s all about before explaining why it’s used.
Cryptocurrency coin burning involves moving a batch of coins or tokens to a wallet that can only receive funds, not send them (also known as a burn or dining address). No one can access the private keys of these wallets, so once the crypto is sent, it can never be retrieved. Any and all crypto, including fractions thereof, can be transferred in this process.
The burning process essentially destroys the cryptocurrency, permanently taking it out of circulation. But why is this done? Why would anyone want to destroy cryptocurrencies?
Why do cryptocurrencies burn coins? Does burning coins affect value?
One of the most important factors influencing the price of cryptocurrencies is supply and demand. The crypto market is heavily reliant on demand from investors and traders, and the balance between supply and demand can easily be thrown out of whack. If the demand for a coin falls while the supply continues to increase, its price can take a small hit or even plummet.
But coin burning can help the price of a coin recover to a certain extent (in certain scenarios). The reason for this is quite simple: burning coins decreases the circulating supply. Less supply means more scarcity, resulting in more demand and an increase in value.
For this to affect the price, a large number of cryptocurrencies must be burned, not just a handful of coins. And, if a coin has a finite supply that it’s getting close to, developers may be hesitant to do a big burn.
Cryptocurrencies can also be burned to reward or incentivize investors. When the price of a crypto rises, this can encourage more people to invest, which increases demand and pushes the price even higher.
Lastly, burning can be carried out according to the proof-of-burn (PoB) consensus mechanism. PoB uses periodic burns to ensure that miners have good intentions within the network and to address the worryingly high power consumption of the popular proof-of-work (PoW) mechanism used by Bitcoin and Dogecoin.
So if burning can be so beneficial, who is really doing it?
What cryptos burn tokens? 4 examples
Binance is not just a massively popular cryptocurrency exchange. also houses two blockchains that use the native currency: Binance Coin (BNB). This coin has gained a lot of traction in recent years and now stands as one of the most frequently traded and valuable cryptocurrencies in the industry.
Binance Coin developers make quarterly burns using two mechanisms in what is known as Auto-Burn. The Auto-Burn will eventually halve the total supply of BNB in circulation, wiping out 100 million BNB, which will hopefully ensure that the price of BNB never drops too low and, at the very least, maintains its price.
The Auto-Burn mechanism alters the number of coins burned based on the BNB price and block number, meaning there will never be an over or under burn.
Binance completed its Quarterly Burn 19 in April 2022, destroying 1,839,786.26 BNB (worth over $500 million!). At this point, these large burns have not had a massive positive effect on the BNB price, but have resulted in a slight increase.
2. Shiba Inu coin
In 2021, Ethereum co-founder Vitalik Buterin received 50% of the Shiba Inu Coin supply from its creators. A great move, indeed. But surprisingly, Buterin decided to burn 90% of the SHIB he received. In total, more than 400 trillion SHIBs were burned, which amounted to about $7 billion at the time. The remaining 10% was then donated to charity.
Buterin claimed that he did this so that he would not be seen as some kind of central power within the SHIB ecosystem. So there was no financial goal behind this massive burn, but at least the charities got a bunch of cryptocurrency to use forever.
In May 2022, Terra Labs’ LUNA and UST cryptocurrencies suffered a catastrophic accident after the price-stabilizing equilibrium between the two currencies collapsed. This caused huge financial losses, and investors and supporters alike began to suggest a full-scale burning of LUNA to hopefully help it recover to some extent. Since Terra has stopped minting LUNA altogether, this isn’t a bad idea (at least in theory).
But Terra founder Do Kwon was not a fan of the idea, although this did little to stop Terra enthusiasts from burning their cryptocurrencies. Kwon eventually cracked under public pressure and shared a public burn address on Twitter for Terra owners, but warned that burning LUNA would not be beneficial. However, many disagree with Kwon and continue to burn LUNA to decrease supply and increase its value. Time will tell if this has any kind of positive effect.
Since August 2021, the crypto giant Ethereum has been burning huge amounts of Ether. Billions of dollars worth of ETH have been destroyed so far, but why is this happening?
There are several reasons why Ethereum developers have started burning ETH on such a large scale. First of all, there is the goal of reducing the rewards available to Ethereum miners as some try to increase their rewards by taking advantage of the mining system. Second, ETH is being burned to stabilize Ethereum transaction fees. And of course, burning ETH can mitigate your supply surge (for which there is no total limitonly an annual limit of 18 million ETH), which results in a price increase.
Prices of cryptocurrency burning controls
While burning crypto is not a guaranteed way to increase value, it can be useful if done at the right time. In addition to this, coin burning can cause a number of other positive outcomes, including fee consistency and investor satisfaction. So while it may seem silly to literally burn money, the results can often be much more impressive than you think.
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