What Is Cryptocurrency Burning?

The idea behind crypto burning is to recall some tokens from circulation by sending them to a dormant wallet.

The crypto burning reduces the number of tokens in circulation and increases the token values.

Traditional financial institutions such as the Central Bank and Public companies call back shares and sell bonds using similar techniques.
The burner or eater account where you send the token will permanently erase it from circulation.

An excess token in circulation will drop its purchasing power and value, and Crypto burning is necessary to increase its purchasing power.

Your blockchain wallet is different from a burner or eater wallet, and the former has a private key and can send/ receive tokens, and the latter has no private key and can only receive tokens.

Stablecoins and LUNA have burnt some amount of their coins in the past to retain their value.

The Cryptocurrency market is similar to the traditional market in so many ways. Even though sharp differences still exist.

The primary reason for cryptocurrency burning is to reduce the number of coins in circulation.

The developers will intentionally send some excess tokens in circulation to an account and permanently save them there.

This process of “burning” is likened to the traditional financial market where the Central Bank sells bonds or adjusts the amount of money in circulation to limit excess amounts in the hands of the people.

Public traded companies also buy back stocks to reduce the number of shares in circulation among shareholders.

These are the practical and familiar scenarios of cryptocurrency burning.

This article will examine the concept of Cryptocurrency burning, the practical reasons for coin burning, and the impact on the crypto market.

Let's begin!

What Is Crypto Burning?

---

Image: CNBCtv

Cryptocurrency Burning is the process or procedure whereby holders of a token can remove such a token from circulation.

To reduce the number of coins in use, the developers will "burn" the coin, also called Coin burning.

How do you burn the coin? You send the number of tokens you want to eliminate from circulation to a "special" wallet address. This wallet address is outside the blockchain network, and it can only receive the coin and can not send it out once it receives it.

The wallet address for burning crypto tokens is called the "burner" or "eater." You have removed the burnt coins from the available supply when you successfully burn the tokens.

The act of crypto burning is permanent, and you permanently remove the number of tokens from circulation and confine them to the burn wallet.

The difference between your wallet address and the burner or eater wallet is that your wallet address can receive and send tokens to other wallets on the blockchain network. Albeit, the burner wallet address can only receive.

The burner or eater wallet can only receive because they do not have a private key. A crypto holder's wallet account has a private key that enables you to access your stored tokens.

At this juncture, we shall identify the significant reasons why Cryptocurrency burning is done.

Practical Reasons For Crypto Burning

---

Image: Yahoo Finance

These reasons include;

To adjust its (excess) availability Sometimes, miners will mine these tokens in excess and have too much in circulation.

When such coins become too much in circulation, they tend to drop in value and be after limited transactions on the blockchain. So you're spending more of such tokens on something of less value because you have it in excess.

Developers and holders will then decide to burn some to reduce the amount in circulation.

To increase its value and purchasing power.
This is the most important reason for crypto burning.

At a point, the amount of cryptocurrency in circulation will increase and become excessive in holders' hands. Excess of a token in circulation will reduce its value and purchasing power.

To ensure that value doesn't drop further and that the token regains its purchasing power, you will intentionally send some amounts to a burner or eater wallet.

This act will reduce the number of tokens in circulation, making them scarce, and more people will start demanding them, thereby increasing their value and purchasing power.

Burning crypto tokens is similar to public listed companies buying back their shares. When these companies buy back their shares from shareholders, they are trying to increase the value of those share units. Crypto burning is done to achieve the same goal.

Examples Of Cryptocurrencies That Have Burnt Their Coins In The Past.

StableCoins

---

Stablecoins are known for minting new tokens and burning them to maintain their dollar-pegged value.

If the demand for stablecoin reduces and the price value declines below its dollar peg, the network's smart contract will automatically remove some amounts from circulation. Those amounts removed from circulation will be sent to a burner wallet.

LUNA token

---

In November 2021, the Terra project burned its Luna token of 88.7 million units. The value of the burned token was about $4.5 billion and was considered the most significant Layer1 token burn ever.

In the days that followed the event, the price of the LUNA token increased, and the token set a new record high price after the massive crypto burn.

Conclusion

---

Experts describe cryptocurrency burning as destroying the tokens permanently. You send the amount to a wallet, and that's the end of such tokens. No one can retrieve them or send them out to an active wallet.

The impact of crypto burning is not immediate, and it may take a while to see the result. Sometimes, when the developers burn a certain amount of the coin, the impact may be negative.

We have seen scenarios where the news of the crypto burning overwhelms the impact and leads to investors dumping the coin.



Author: Valentine. A, Gate.io Researcher
This article represents only the researcher's views and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.