People trading in cryptocurrencies must have heard about cryptocurrency coins burning. Well, why burn a coin even though it has some value?
Burning a coin in cryptocurrency does not necessarily mean burning an asset physically but removing some coins out of market circulation. This means, once a coin is burnt, it becomes unusable or gets destroyed so that no one can use them further. All the miners and developers send burnt coins to a special address that has private keys inaccessible to the others. They must also provide users with a proof-of-burn algorithm to facilitate cross-check.
Why a crypto coin is burnt?
A coin in the crypto realm is burnt to generate a crunch in coin supply which artificially creates an upward trend for the coin price. It is just like making a product scarce in the market where traders show a willingness to pay a higher price for the leftovers.
Why does crypto coin creators burn their coins?
Crypto creators usually burn their coins to raise their coin value in the market which is in circulation. If an excessive coin is issued in the crypto market, it may increase inflation just like the issuance of excessive currency increases inflation in the economic system. Almost every crypto coin creator develops a network that has pre-defined protocols and mechanisms used for burning the coins. However, not every coin needs to get burnt. Only those coins which have excessive supply is burnt.
What is the main objective behind cryptocurrency coin burning?
One of the primary objectives behind burning a crypto coin is to manage and regulate coin supply in the market and stabilize its price as well. This is a process very similar to the demonetization of a currency or shares buy-back process. For example, when any country faces inflation because of excess money supply, the interest rates are increased by the banks. Although this is not like burning coins, both have similar kinds of objectives i.e., controlling inflation.
How does coin burn impact the market?
As discussed earlier, the burning of coins stabilises the market price of coins besides controlling inflation. When Bitcoin coins were burnt a few days before, Bitcoin did gain value. However, burning BNB tokens did not provide any appreciable returns or rise in price for traders. But then, coin burning can prove whether the coin creators are dedicated to their currency or not. Putting succinctly, different coins react differently when burnt by their creators.
How does coin burn impact investors?
The burning of coins is very significant because investors receive a tangible profit since the coin value is increased subsequently. Secondly, the coin burning process demonstrates that the coin price will be stable due to self-regulation policies. Even though regulators do not control the crypto market, coin burns reveal that the market will be stable in the long run. For instance, when a stock reaches upper or lower circuits, the stock exchange suspends further trading for that particular day so that prices remain stabilised. However, the digital currency does not allow such practice. Therefore, the coins get burnt themselves or by the creators to protect investors’ confidence in the coin and stability of the crypto market.