Burning crypto is a typical event executed by a cryptocurrency platform. This practice permanently removes the token or coins from circulation, eventually reducing the available number of tokens. The transferred token can be used or retrieved from the inaccessible wallet as it has a private key that no one is aware of. This process is often illustrated as destroying tokens. Burning crypto coins will increase the value of assets and captivate investors.
How to burn crypto tokens?
Crypto burning can be accomplished by transposing tokens to a wallet where any transaction is restricted. Developers or miners will do this to increase the value and deploy the supply.
If someone has to burn cryptocurrency, they have to transfer the token to the ‘eater address’ or ‘burn address’. This address will have a private key or master key. Nobody can access this without this private key, which is one of the key features of this address. A public key (shareable blockchain address) will be available for the account. For example, the public key of the burn account on Ethereum is XXXXXXXXXX, and has no associated pass key, ensuring that no one has access to the token sent, effectively burning them.
Factors Behind Crypto Burning
There are several reasons to burn cryptocurrency. While some burn accidentally others perform intentionally. Some of them are discussed below:
Wrapped tokens and stablecoins: Wrapped tokens reflect the cryptocurrencies, whereas stablecoins try to sustain a 1:1 value with a reserve asset such as the US dollar. Issuers declare to keep the corresponding amount of cash or cryptocurrency to support these assets. Issuers burn the received tokens to mirror the new reserve balance assuring each token keeps its value, while people retrieve those coins or tokens.
To manage supply: Blockchains like Ethereum and BNB Smart Chain perform burning. As burning permanently removes the token from circulation, these blockchains execute the same to reduce the regularly created coins or tokens, thus equalizing the new coin distribution.
To gimmick: Burning sometimes happens just to grab attention from the public. For example, SafeMoon removed a considerable amount of tokens in 2021, which gained huge attention among the crypto community.
To clear scam cryptocurrencies: People might receive unusable cryptocurrencies, which are called ‘Airdrops’. These tokens are transferred to the burn account in order to protect and clear up the account. Some wallets have the feature to burn those spam NFTs and benefit from a small amount of Solana (SOL).
How to get profit during crypto coin burn or swap?
Burning crypto will initiate deflation by reducing the overall supply. As the circulating supply regresses and exiguous the value of the remaining token will upsurge.
Burning crypto and retrieving the shares by the companies are alike, as companies perform this to the shareholders to return the investment. This will minimize the number of shares in circulation, burning tokens also has the same concept.
Some points to be noted to benefit from the crypto burn or swap.
- Forecast Price Changes: Before executing crypto burn or swap a clear vision should be there regarding the rise of cryptocurrency price. This foreseen could effectively increase the value of coins by reducing the supply of cryptocurrency.
- Market Sentiment: Examine the crypto community’s behavior towards the news of coin burn or swap. Positive behavior by the community would increase the demand and price of the cryptocurrency.
- Risk Analysis: The cryptocurrency market is volatile, investors and traders should be aware of the possible risks and make a decision accordingly.
- Keep Abreast: Stay up-to-date about the upcoming coin burn and swap. Interpreting why this practice happens and its possible impact on cryptocurrency value will help to make a decision.
- Long-term Investment: Some investors consider this event as a project’s commitment and for long-term sustainability, and holding on to their cryptocurrency during this event will benefit over time.
Profiting from a Crypto burn or swap will be easier if traders and investors have a keen knowledge of these points.
Boons and Banes of Burning Cryptocurrency
| Boons | Banes |
|---|---|
| Help to control inflation and coordinate with project goals by reducing the number of tokens in circulation | To manipulate prices or divert funds to personal wallets, some projects maliciously declare to burn tokens. In 2021, one of the poorly coded burn mechanisms was destroyed by hackers. |
| Through organized token burns, supply has been reduced, possibly boosting scarcity, and impacting long-term value. | The burn address is unilateral, the tokens transposed to this address cannot be retrieved. Users should be vigilant while doing transactions to this address. |
| Assuring wrapped tokens and stablecoins maintain a consistent and stable value. |
A better understanding of possible risks and benefits has to be noted before dealing with a project. Projects might have burning mechanisms and tokens, and traders and investors should be aware of the positives and drawbacks of burning cryptocurrency.
In closure, crypto burning is critical and vital. This helps to control inflation, reduce supply, and assure value stability. This practice has a set of pros and cons and there is no assurance this will increase the cryptocurrency price. Anyone who desires to engage with cryptocurrency should have a thorough knowledge of burning, particularly if investing in platforms that perform this mechanism.
Read more : How To Trade Cryptocurrencies: A Beginner’s Guide.
