Burning cryptocurrency is different from burning physical assets like fiat money. As a matter of fact, crypto burning has several uses that every investor should know.

If you are planning to get involved in the crypto world, you need to prepare yourself to learn a bunch of things. While the existence of cryptocurrency itself is no longer new, the industry's development is massive and keeps growing. You might come across a new term or a new concept to learn about every time you take a deep dive into it. For instance, burning a real-world asset might sound extreme, but burning crypto is actually pretty common.

Crypto burning illustration

In fact, crypto burning is one of the most crucial concepts in the digital currency industry right now. The practice started and became popular since 2017. A number of developers are said to have burned millions, billions, even trillions of their tokens. But why would they do that?

 

What is Crypto Burning?

Crypto burning means you permanently remove a certain amount of tokens from circulation. In other words, you are destroying those tokens forever so that they no longer exist or are available to use. In the real world, you can literally burn your physical assets, such as money or a house, and watch them disappear from existence. This, however, won't work for digital assets, so you must use digital means to perform the action.

Crypto burning can be done in several ways, but the most common one is by sending the token to an unusable wallet address, also commonly known as a burn address or an eater address. It is basically a one-way address that cannot be accessed or controlled by anyone. There is no way to recover or withdraw the tokens that are already sent there because there is no private key corresponding to the address. So, once a token is burned, it's simply gone forever.

 

How Did Crypto Burning Start?

The idea of coin burning actually dates back way before the existence of cryptocurrency. It's pretty similar and most likely inspired by the act of stock buyback. A stock buyback occurs when a company that issues the stock buys the shares back at the market price and reduces the number of coins in the circulating supply. This isn't exactly the same as crypto burning, but it has the same concept to begin with.

Crypto burning was first introduced in 2017 and became popular in 2018 when the companies behind BNB, BCH, and XLM burned their tokens to cut supplies and boost the coins' prices. The innovation quickly became mainstream and it is now a common strategy, especially among new cryptocurrencies in the market.

 

Who Burned Their Crypto Tokens?

Technically, anyone can burn any crypto. All cryptocurrencies can be sent to a burn address, so there is no exception for crypto burning. It is completely up to the crypto holders to decide whether they want to burn their tokens or not. Most of the time, crypto burning is done by developers or crypto exchanges as a part of their programs.

The first example comes from the widely known crypto exchange Binance. Since 2017, Binance has been committed to remove 100 million BNB or half of its supply from circulation through quarterly burns. In 2022, it introduced a new method called Binance Auto-Burn, which means that the number of tokens removed will be automatically calculated. The method was first implemented in the last quarterly burn, where Binance successfully destroyed 1.6 million BNB which equaled around $750 million.

There is also Stellar, a crypto company that burned 55 billion of XLM or half of its total supply in 2019. Another interesting case is when the developers of Shiba Inu, the famous meme coin, gave a bunch of its coins to Vitalik Buterin, the co-founder of Ethereum, back in 2021, only to find out that the man decided to burn 90% of those tokens and donated the rest. Even stablecoins like USDT, USDC, GUSC, and HUSD have also been burned no less than $2.8 billion coins of their circulating supply.

 

What are the Benefits of Crypto Burning?

Now you must be wondering why do big companies like Binance and Stellar voluntarily throw away a lot of their money like that and even make it a regular agenda. If you don't know the reason, the idea of burning your own money might sound ridiculous to consider, but then again, cryptocurrency works differently than traditional assets. Crypto burning actually has several notable benefits that you should know.

Firstly, burning cryptos will affect supply and demand. By burning a certain amount of crypto, you will reduce that number of crypto from circulation, which then creates a "deflationary" event. The idea is that since the supply decreases, the price of the remaining coins will more likely increase due to their scarcity and limited number. Such a concept is actually similar to the case where companies buy back their shares as means to "return the value" to their shareholders. Crypto projects like the one created by Binance more or less work the same way.

Why make crypto burning a regular event? The reason is simple: to attract more clients and earn credibility. In other words, companies tend to use crypto burning as a part of their marketing tactics. By showing the public and potential investors that the coin supply continues to shrink over time due to regular burning events, the company could assure them that the coin is getting scarce and the price will only rise in the future. This also eliminates public concerns on inflation and an overly diluted market.

Crypto burning can also stabilize the price of stablecoins and keep it pegged to the dollar value. If the demand for a stablecoin rises and the price drops below its average dollar peg value, the protocol's smart contract will automatically issue a necessary amount of new tokens to stabilize the value and vice versa. Crypto burning is a rather transparent way of telling people about when the funds are added or removed.

Moreover, crypto burning can also be beneficial in a Proof-of-Stake protocol. When a large number of tokens are removed from the circulating supply, there's a higher chance that stakers will receive higher staking rewards.

 

What are the Impacts for Crypto Investors?

Not only for big companies, but crypto burning can also have impacts on crypto investors. The first and perhaps the most obvious one is the tangible benefit through increased valuation.

Let's say Project A conducts a token burn. A while later, their token supply decreases and the value of the token rises by 10%. As a result, this has made the community holder's token more valuable than it was before the burn. If you have 1,000 units of tokens in your wallet, then the value of your overall balance will also increase by 10%, even though you still hold the same number of units.

See also: Cryptocurrency Top Gainers

Even better, you can actually anticipate the rising value by paying attention to the burning schedules announced by crypto companies. This can also be applied to stablecoins as they regularly burn coins to stabilize the price in the absence of regulators. Therefore, crypto burning can be a great addition to your analysis in crypto trading and investing. It could be a great idea to buy some coins prior to the crypto burning schedule. When the value rises, you could sell the coin for a higher price and earn a profit.

 

What is Proof-of-Burn?

It is worth mentioning that crypto burning can also be used as the basis of a consensus algorithm. Proof-of-Burn is the consensus algorithm that uses crypto burning as a way to verify and add transactions on a blockchain. It's a relatively new alternative protocol as most blockchains use either Proof-of-Work or Proof-of-Stake to operate.

In the Proof-of-Burn consensus algorithm, the miner needs to burn their own tokens to earn the right to mine new blocks on the blockchain. The more tokens they burn, the bigger their chance of mining a block. In some blockchains, the miner must burn the same currency that they're mining, but in some others, they shouldn't have to. In return, they will be rewarded with cryptocurrency for every transaction that they managed to verify.

Proof-of-Burn is said to be able to prevent fraudulent activities and make sure that only valid transactions can pass through. Another notable advantage is that the process is pretty simple, efficient, and doesn't need a lot of energy compared to the Proof-of-Work model.

 

Final Thoughts

Crypto burning is a crucial aspect of the crypto industry that every investor should know. As for now, the practice of burning crypto itself is more profitable for big companies that actually own a significant number of tokens to burn since it can affect the supply and demand of the tokens in the market. Additionally, crypto burning is also useful for retail investors; the event generally gives a positive impact as it reduces the number of tokens and increases the value over time.

The most important thing as an investor is to know what is crypto burning, when it will happen, and how it can affect the market. In general, you could look for coins or tokens that have been burned before or have burning schedules coming up. It might give you a boost of confidence to start investing in a cryptocurrency knowing that the coin will increase in value.