What does it mean to burn crypto? Crypto burning explained
What does burn mean in crypto? Crypto burning means intentionally destroying digital tokens or coins. Once burnt, these tokens are gone. This might seem counterintuitive to some investors. Why would a blockchain project purposely destroy some of its own tokens?
In this article, we’ll break down the reasons behind token burns, look at their effects on projects and investors, and provide insights for investors managing this complex space. What is burning crypto?
Table of Contents
What does burning crypto mean?
Publicly traded companies often use a practice called share buybacks, where they repurchase shares from investors to reduce the number of shares in circulation. Crypto projects use a similar concept: creators and developers of decentralized platforms send a portion of circulating tokens to an address that has no private key, effectively and permanently removing them from circulation. This is known as crypto burning.
Some tokens are also taken out of circulation accidentally. A lot of early Bitcoin miners and investors misplaced their private keys, which means those assets are locked away forever, unable to be sold.
But why would anyone want to burn cryptocurrency?
Why do cryptocurrencies burn coins?
The reason for coin burning depends on the goals the project team wants to achieve. At first glance, burning coins might seem illogical — why would a project burn its own tokens to reduce its supply? That said, there are a few reasons for this approach, which we’ll walk you through, along with the benefits it offers.
Increasing token value with scarcity
Coin burning is a strategic move to stoke the value of a particular token by reducing its circulating supply. When tokens are deliberately removed from circulation, scarcity is created, typically driving up demand for the remaining tokens. This leads to an uptick in token value, thanks to the age-old dance of supply and demand.
Breathing new life into lackluster projects
Occasionally, coin burns emerge as a lifeline for projects that have lost their spark or stalled. A well-executed token burn can whip up a frenzy of excitement, catching the eye of investors and amplifying trading volume.
With fresh interest and support, projects can harness the momentum to push forward and realize their ambitions.
Reducing inflation and safeguarding stability
Cryptocurrency burns are vital in curbing inflation by shrinking the overall token supply. Left unchecked, inflation can gnaw away at token value and destabilize prices.
Periodic token burns are like a well-timed jab, keeping inflation in check and preserving the project’s and its investors’ long-term prospects.
Leveling the playing field for distribution and governance
Token burns can also be a great equalizer, ensuring a more equitable distribution and governance within a decentralized project.
When a project accumulates tokens through fees or other means, incinerating those tokens stops the project’s team from hoarding the lion’s share. This leads to a decentralization safeguard that hinders manipulation or control by any single party.
Examples of coin burns
The following are some of the most notable burn events in the cryptocurrency world:
Serum DEX burned $1.3 million worth of SRM to increase token scarcity
Serum, a popular decentralized exchange on the Solana (SOL) blockchain, conducted a notable burn event in May 2021 in which 84,538 SRM ($1.03 million) were destroyed, and 21,134 SRM ($257k) were dropped to stakes.
This action followed previous burns in September 2020 and April 2021, which destroyed $400k and $600k worth of SRM, respectively.
The Serum team aims to maintain low token circulation to increase SRM’s scarcity through continuous coin burns, which boost prices in the long run.
SHIB community reduced circulating tokens
In May 2023, the Shiba Inu community significantly reduced the number of SHIB meme tokens in circulation by burning 3.03 billion SHIB in a single day.
The token burn event contributed to the increased scarcity of the meme coin and its potential for a significant price increase in the future.
How does crypto burning work?
Projects use smart contracts to burn crypto. It’s a technical process, but it basically means instructing the contract on how many tokens to destroy. 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.
Can burned crypto be recovered? No, burned crypto cannot be recovered. Once removed from circulation, it’s gone for good — no one can retrieve it. The burn shows up as a transaction on the blockchain, so everyone can see it.
Impact of burning crypto on price and market
Now, let’s break down what token burns mean in practice and how they can influence the direction of both crypto projects and investors.
Boosting investor confidence
Token burns show a project’s commitment to maintaining value, supporting growth, increasing investor trust, and attracting new supporters. Projects actively managing token supply and combating inflation demonstrate their dedication to preserving investor value and bolstering investor confidence.
Improving market perception
When a project conducts a token burn, it often catches the attention of traders and investors, increasing trading volume and liquidity and ultimately helping the project regain its competitive edge.
Unlocking new opportunities
As the token value and market perception improve, other projects or organizations may take notice, opening doors for growth and expansion through collaboration or integration.
Encouraging long-term investment
Increased token value due to token burns may motivate investors to hold onto their tokens, fostering a healthier ecosystem.
Moreover, investors are more likely to contribute to a project’s growth through participation in governance or community activities, creating a more stable investor base and sustainable ecosystem.
Reinforcing good tokenomics practices
Token burns promote healthy tokenomics practices, contributing to a more robust and well-regulated cryptocurrency market. As projects recognize the benefits of token burns, they may adopt similar strategies, fostering a more sustainable and successful future for the entire industry.
Pros and cons of burning cryptocurrency
Burning crypto has its pros and cons. On the good side, it makes tokens scarcer, potentially raising their value. It shows the project is thinking long-term and keeps inflation in check. Plus, burning tokens can reward loyal holders or inspire positive actions in the community.
On the downside, burning too much could hurt future fundraising and might seem like a quick fix to raise value. If it’s done too often, it could cause instability, leaving investors uncertain about the project’s direction.
In conclusion, crypto burning can have a big impact on the future of the cryptocurrency world. Its effects can ripple through projects and investors alike. Understanding token burns’ motivations and real-world implications is crucial for navigating this ever-evolving landscape.
FAQs
What does it mean to burn crypto?
Burning crypto means permanently removing tokens from circulation by sending them to an address no one can access. It’s a strategy to reduce the supply, create scarcity, and possibly boost the value of the remaining tokens. Once burned, those tokens are gone for good and can’t be recovered.
Does burning crypto increase its value?
Burning cryptocurrency 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.
Do you lose money when crypto is burned?
If you own the tokens that are being burned, then yes, you would lose the value of those tokens. However, suppose the burn is successful and leads to an increase in the overall value of the cryptocurrency. In that case, it could offset the loss and result in a net gain.
