What does it mean to burn crypto? A guide to coin burning

What does burn mean in crypto? Crypto burning refers to deliberately destroying digital tokens or coins. Once burned, these tokens disappear. This may seem counterintuitive to some investors. Why would a blockchain project deliberately destroy some of its own tokens?

In this article, we will explain the reasons behind token burns, look at their impact on projects and investors, and offer insights for investors navigating this complex space. What is crypto burning?

What does burning crypto mean?

Public companies often use a practice called share buybacks, in which they buy back shares from investors to reduce the number of shares outstanding. Crypto projects use a similar concept: creators and developers of decentralized platforms send a portion of circulating tokens to an address without a private key, effectively and permanently removing them from circulation. This is called crypto burning.

Some tokens are also removed from circulation by mistake. Many of the early Bitcoin miners and investors lost their private keys; This means that these assets will be locked forever and cannot be sold.

So why would anyone want to burn cryptocurrency?

Why do cryptocurrencies burn money?

The reason for burning coins depends on the goals the project team wants to achieve. At first glance, burning coins may seem counterintuitive; Why would a project burn its own tokens to reduce supply? However, there are several reasons as well as the benefits this approach offers that we will explain to you.

Token value increasing with scarcity

Coin burning is a strategic move to increase the value of a particular token by reducing its circulating supply. When tokens are deliberately removed from circulation, scarcity is created and demand for remaining tokens often increases. This leads to an increase in the token value, thanks to the age-old dance of supply and demand.

Bringing new life to lifeless projects

From time to time, coin burns turn out to be a lifeline for projects that have lost their spark or have stalled. A well-executed token burn can increase excitement, attract investors’ attention, and increase trading volume.

With new interest and support, projects can use the momentum needed to move forward and achieve their goals.

Reducing inflation and maintaining stability

Burning cryptocurrencies is vital in reducing inflation by shrinking the overall supply of tokens. If left unchecked, inflation can eat away at token value and destabilize prices.

Periodic token burns are like a well-timed injection; It keeps inflation under control and protects the long-term expectations of the project and its investors.

Leveling the playing field for distribution and management

Token burns can also be a great equalizer, ensuring more equitable distribution and governance in a decentralized project.

When a project accumulates tokens through fees or other means, burning those tokens prevents the project team from hoarding the lion’s share. This leads to a decentralization protection that prevents manipulation or control by any party.

Examples of coin burning

Some of the most notable burns in the cryptocurrency world include:

Serum DEX burned $1.3 million worth of SRM to increase token scarcity

Serum, a popular decentralized exchange on the Solana (SOL) blockchain, had a notable burn event in May 2021, where 84,538 SRM ($1.03 million) was destroyed and 21,134 SRM ($257 thousand) went into shares.

This action follows previous burns that destroyed $400,000 and $600,000 worth of SRM in September 2020 and April 2021, respectively.

The Serum team aims to maintain low token circulation to increase the scarcity of SRM through continuous coin burning, which increases prices in the long run.

SHIB community reduced tokens in circulation

In May 2023, the Shiba Inu community burned 3.03 billion SHIB in a single day, significantly reducing the number of SHIB meme tokens in circulation.

The token burn event has contributed to the increasing scarcity of the meme coin and the potential for a significant price increase in the future.

How does crypto burning work?

Projects use smart contracts to burn crypto. This is a technical process, but it basically means giving instructions to the contract about how many tokens to destroy. The smart contract will then verify that they have sufficient funds in their wallet and then perform the burning. The smart contract will send the tokens to an inaccessible, randomly generated address.

Can burned crypto be recovered? No, burned crypto cannot be recovered. Once removed from circulation, it disappears completely; no one can take it back. The burn appears as a transaction on the blockchain so everyone can see it.

Impact of crypto burning on price and market

Now let’s explain what token burns mean in practice and how they can affect the direction of both crypto projects and investors.

Increasing investor confidence

Token burns demonstrate a project’s commitment to preserving value, driving growth, increasing investor confidence, and attracting new backers. Projects that actively manage token supply and combat inflation demonstrate their commitment to preserving investor value and increasing investor confidence.

Improving market perception

When a project conducts a token burn, it often attracts the attention of traders and investors, increases trading volume and liquidity, and ultimately helps the project regain its competitive edge.

Unlocking new opportunities

As the token value and market perception improves, other projects or organizations may take notice and open the doors to growth and expansion through collaboration or integration.

Encouraging long-term investments

Increased token value due to token burns can motivate investors to hold their tokens, promoting a healthier ecosystem.

Moreover, investors are more likely to contribute to the growth of the project through participation in governance or community activities, thus creating a more stable investor base and a sustainable ecosystem.

Strengthening good tokenomic practices

Token burns contribute to a more robust and well-regulated cryptocurrency market by promoting healthy tokenomic practices. As projects realize the benefits of token burning, they can adopt similar strategies, ensuring a more sustainable and successful future for the entire industry.

Pros and cons of burning cryptocurrency

There are pros and cons to burning crypto. The upside is that it makes tokens less scarce, potentially increasing their value. This shows that the project is thinking long term and keeping inflation under control. Additionally, burned tokens can reward loyal holders or inspire positive actions in the community.

On the downside, burning too much can hurt future fundraising efforts and seem like a quick fix to increase value. Doing it too frequently can cause instability and leave investors uncertain about the direction of the project.

As a result, crypto burning could have a huge impact on the future of the cryptocurrency world. The effects can spread to both projects and investors. Understanding token burning motivations and real-world consequences is crucial to navigating this ever-evolving landscape.

FAQ What does burning crypto mean?

Crypto burning means permanently removing tokens from circulation by sending them to an address no one can access. It is a strategy to reduce the supply, create scarcity and possibly increase the value of the remaining tokens. Once burned these tokens are completely lost and cannot 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 increasing demand for the remaining tokens. This can increase the token value due to the basic economic principle of supply and demand.

Will you lose money when crypto is burned?

If you have burned tokens then yes, you will lose the value of those tokens. However, let’s assume that the burn is successful and leads to an increase in the overall value of the cryptocurrency. In this case, the loss can be compensated and a net gain can be achieved.