What is Burning Crypto? Understanding Its Impact & Process

People talk about “burning” millions of crypto tokens. Did you ever stop to wonder why? When I first explored the crypto sphere, it seemed strange to me-how could someone destroy their money? As an adolescent, I was fascinated with such an idea worthy of contemplation. I learned that an actual burning process was an alluring concept and had something to do with how cryptos manage the value of themselves as I furthered my study on cryptocurrencies.

Crypto Burning: What It Means and How It Works

Cryptocurrency burning means sending the tokens to such an address that no one will ever use or access it again. This is like dropping cash in an unending pit-if the tokens are deposited there and disappear, they simply cease to exist. The burn address is one that is not assigned to any person and cannot be accessible by any person; it mostly serves as an online blackhole to possess cryptocurrency. When tokens are sent to it, the address is removed from circulation forever, thereby reducing the coin’s supply.

I initially thought a bit about it-how fringe! The burning of crypto has become quite widespread with the decrease of 2017. Developers of minor as well as major cryptocurrencies burn billions, millions, or millions of coins.

How to Burn Cryptocurrency: The Process Simplified

You can burn your crypto by sending it to a burning address. Just with a disclaimer, you would never want to burn your cryptocurrency if only it amounted to just throwing it away! The burning process is generally initiated by the creator or the goat-worshippers of a cryptocurrency set in their tokenomics.

Burning can take several different forms depending on the blockchain; however, the general procedure is this:

• Tokens are sent to an unverified address (usually an address without a public key)

• The transactions go through verification and are thus saved on the blockchain

• The total supply of cryptocurrency goes down

• They cannot be used or redeemed

Some cryptocurrencies have burning built into their protocol superficiality; wherein a portion of the transaction fee and other operation causes token burning at intervals.

Crypto Burn Rate: Everything You Need to Know About Token Destruction Rates

The crypto term burn rate simply denotes how fast the coins get destroyed. It can be calculated in a variety of ways-daily number of tokens transacted for burning, absolute number of tokens burnt each day, in particular transactions, or in specially organized burning events.

Returning to Binance Coin (BNB), there have been quarterly burns since 2017. In 2017, 20% of their profit was returned to the customers, selling BNB. Ultimately, they are targeting to burn 50% of the total BNB cut in circulation. This regular and predictable burning rate gives investors some clue about how the amount of BNB would change over time.

Other projects may offer varying rates of burn. For example, a DeFi protocol may burn tokens according to transaction volume. In this case, the burn rate varies with usage. Knowing the project’s burn rate aids in determining the pace of supply reduction.

Top Reasons Why Cryptocurrency Is Burned

When I understood what burnt crypto was and what it entailed, my next concern became: “But WHY?” It appears there are several strategic reasons why a crypto project may want to burn some tokens.

1. A Perceived Increase in Value

The first point, therefore, remains the most important one. By diminishing the amount of cryptocurrency, burning could increase the scarcity, and thus an increase in prices may occur. In very simple terms: If demand is constant and supply is lowered, prices tend to increase.

This has happened many a time in the marketplace. The announcement of a large-scale burning of tokens by any startup normally rises spirits among investors. However, it is important to truly understand that burning does not necessarily lead to an increase in price as market forces are complicated, and numerous factors influence the strength of tokens.

2. Fighting Inflation

Some cryptocurrencies are created in such a way as to be inflationary, i.e., new coins are continually created through mining or stake rewards. Now if tokens are burnt, it counters the effects of inflation by removing tokens from being in circulation, thereby maintaining the equilibrium in prices.

3. Proof-of-Burn Consensus

I stumbled into an amazing notion: some blockchain companies apply token burning as a consensus mechanism! Called Proof-of-Burn, this process requires miners to burn some tokens as the right to create blocks. Depending on how many tokens they burn, they earn more mining power.

Unlike Proof-of-Work, which consumes massive amounts of energy, Proof-of-Burn is really an environmentally conscious way of verifying-the miners must burn something worthless for the right to participate, their tokens.

4. Community Value Return

Here and there, tokens are burnt so that value may flow back into the community. These holders receive no dividends (which might stir up regulatory probes); instead, they just destroy a portion of their tokens-theoretically increasing the value of all those tokens remaining.

Real-World Examples of Crypto Burning and Their Effects

Here are a few of the most noteworthy ones I have seen in the crypto space:

• Binance Coin (BNB): As aforementioned, since 2017, Binance has been carrying out a quarterly periodical burning of BNB tokens, hoping to have half of the BNB tokens eventually burnt. The burning schedule is an answer to the crypto calendar and is something the cryptos look forward to.

• Stellar (XLM): In the year 2019, the Stellar Development Foundation hit the news for burning more than 55 billion XLM tokens. That is almost half the entire supply! This enormous one-time burning reduced Stellar’s supply in a single day.

• Shiba Inu (SHIB): This is one of the most popular moments of history for burning. The SHIB token creators gave 50 percent of the SHIB amount to Ethereum founder Vitalik Buterin, presumably as part of a PR campaign. It was surprising that Buterin burned 90% of these tokens (worth billions of dollars at the time) and donated the rest to charity.

Potential Risks and Disadvantages of Burning Cryptocurrency

Burning of cryptocurrency tokens, though it elegizes conversion to a better idea, has several drawbacks and should be paid attention to.

• The Possibility of Manipulation

Sometimes a token burning may be orchestrated to form illusions. Some less credible groups would announce burning to generate excitement and pump prices when really, they are just transferring tokens to wallets that they themselves own but claim to be burn addresses.

I have personally seen multiple instances of this in depth into the more obscure corners of the cryptocurrency world. Always check the burn addresses and transactions if any crypto project ever declares a very big burn.

• Hidden Whale Concentration

Another issue is that of concentration being masked by burns. Imagine a company that creates one billion tokens, then keeps 100 million to itself, then goes on to burn 600 million. So, they say they have just 10% of the quantity. Well, they have about 25% of the circulated supply, a larger number.

This kind of supply manipulative kind of manipulation may pose a hidden danger to investors who believe ownership is more widely distributed than it is.

• Not Guaranteed to Increase Value

On the contrary, according to economics, the mere study of how burning tokens may be used to increase the value of cryptocurrencies is loaded with assumptions. Utility comes into play, market sentiments set the characters on the stage, competition lies in the foyer, and more elements keep coming onto the stage, all affecting price fluctuations beyond changes in supply.

Crypto Burning: Is It a Positive or Negative Sign for Investors?

By now, an inquisitive mind might wonder if burning crypto is a bullish indicator for investors. To me, this could be so, but immense importance is accorded to the context.

Burns that form part of a transparent, open, and well-communicated tokenomic plan generally demonstrate that the company wants to create long-term value for its holders. Regular burns, with clear intent as in the case of Binance quarterly burnings, tend to go down well with market participants.

Yet, any other kind of burning, especially by very new projects, should be investigated with a view to understand the motive behind it. More times than not, projects tend to use dramatic burning announcements as marketing ploys rather than stemming from logically reinforced economic strategies.

The cry of the holder should be further than just free token burn effort and should concentrate on the issues concerned in the first place. A good coin does not go bad on token burning. Likewise, a bad one does not really get good on token burning.

Concluding Insights on Cryptocurrency Burning and Its Impact

Considering whether tokens have been burnt, plus whether some kind of burning may be instituted as part of a reduction in supply, just goes on my list of things to consider when analysing a project.

If you want to invest in crypto, then pay attention to the burn mechanism and burn schedules as they may greatly impact the economics of a token. Also keep in mind that token burn is only half the story and should be looked at alongside factors like utility, adoption rate, ongoing development, and the trustworthiness of the team.

So, whether you are a seasoned investor or a beginner dipping your toes into cryptocurrencies, being aware of burn practices will give you a little added confidence in going through these rough waters. Like everything else happening in crypto today, make certain that you do your own due diligence.

Would you be willing to share your thoughts on burning mechanisms? Are you part of any companies that have interesting burn mechanisms? Remember, while burnings can indeed have a major influence on the economy of cryptocurrencies, this is not at all the primary factor that should weigh in on investment decisions.