Cryptocurrency burning is a relatively new concept in the crypto world. It started in 2017, which was about 4 years after crypto became a thing.
If you keep up with crypto, you will start to notice people talking about burning coins.
So, what exactly does burning cryptocurrency mean?
Well, it doesn’t mean setting cryptocurrency on fire! With crypto there is actually nothing to set on fire, but that’s a different story. Though it would be equivalent to pulling a $100 dollar bill out of your wallet and setting it on fire.
Let’s take a look at what it means to burn crypto and what is the reason that it happens.
What Does Burning Crypto Mean?
What burning crypto means is permanently removing tokens of that crypto from the supply. Usually this is done by sending the crypto to a dead wallet (burner) that no one has or will ever have access to, essentially making the crypto on that wallet completely useless.
These burner wallets are not accessible by anyone and can only receive transactions and never send them. They can’t send the crypto because they don’t have a private key, which is needed to send transactions on the blockchain. In other words, these tokens are completely destroyed or “burned” from the supply, reducing the number of coins in use.
Stablecoin burning is a little different because they can go both ways. Stablecoins are pegged to a certain amount, usually $1. If the demand for the stablecoin increases, the price will rise. The stablecoin will then mint new coins in order to increase the supply. If the demand for the coin decreases, then the price will decrease. At this time, the stablecoin will burn tokens from the supply in order to bring the price up.
Now, you may be thinking that this is crazy! Why would anyone want to purposely remove crypto from the supply?
Let's find out!
Why Would Someone Burn Crypto?
The main reason you would want to burn crypto is to reduce the overall supply. What's supposed to happen is by reducing the supply, the remaining tokens tend to increase in value. That's because when supply of the crypto falls, the tokens become more scarce, and thus more valuable to have.
Burning crypto creates a deflationary event in which the value of the token rises over time instead of decreases over time.
This is similar to how companies buy back their own shares in order to increase the value of the stock for the shareholders. Crypto devs will burn crypto in order to increase the value for those holding the project’s cryptocurrency.
Usually when burning crypto, the price of the token does not change quickly. It takes time for the crypto's market to feel the effect.
Sometimes when investors hear about a burn that is going to happen they invest more heavily and raise the price over the short term. But burning crypto is mainly for the long run, and most of the time will slowly raise the coin's value. However, there is no evidence that burning crypto increases the value of the token.
Examples of Crypto Burning
Let’s take a look at some of the examples of token burning in the wild.
Terra ($LUNA)
We'll start with the Terra (aka $LUNA) project. Terra burned about 88.7 million LUNA tokens in 2021, which was one of the biggest token burns in cryptocurrency history. These LUNA tokens were worth around $4.5 billion at the time they were burned.
The burning was voted on by the Terra community to remove tokens from the supply. After a few days, LUNA was at an all time high.
Ethereum ($ETH)
Another good example is Ethereum, the second largest crypto by market cap, just after Bitcoin.
In 2021, Ethereum burned over 1 million of its tokens! Now, that might sound like a lot, but in reality it’s not that many. Ethereum has a supply of over 120 million coins as of April 2022.
Ethereum burns their crypto each time there is a transaction. This was to introduce a kind of scarcity into the network, much like how Bitcoin is scarce. There is no limit to the Ethereum supply, meaning coins will always be created during mining.
Burning a small amount during each transaction is a way to counter its inflation.
Shiba Inu ($SHIB)
Shiba is a great example of a project that should be burning coins. Because there are so many Shiba coins in circulation the value of each coin is extremely small meaning the holders can easily hold millions of coins.
If Shiba was able to burn a massive amount of the coins that exist it could possibly
raise the price of Shiba to a penny as the coins become more scarce. Usually, saying that Shiba will go to a penny would cause all of their investors to lose their minds, but this would be one of the ways to make that happen.
Right now, the only Shiba burns happening are community led, in which investors throw away millions of their coins for basically no reason. Since there are over 500 trillion coins in existence, burning a few million or a few billion even is not going to make any difference at all. Shiba would have to burn hundreds of billions or even trillions of coins. For example, Shib would have had to burn about 4 trillion coins to match the percentage that Ethereum burned last year.
So the devs aren’t burning any tokens at the moment, but don’t lose faith yet! Shiba is young and it’s got big dreams, huge! A future upgrade of ShibaSwap, will include a feature that will allow for the burning of Shiba Inu tokens.
Summary
Burning crypto means permanently removing a number of tokens from the supply by sending them to a burner wallet where they can never be accessed again.
The purpose of burning cryptocurrency is to create a deflationary event, which is supposed to make the coin more scarce.
The benefit of burning crypto is as the coin gets more scarce the value tends to rise. Usually, project developers do this to increase the value of the token for the people already holding the coin.
Big projects like Ethereum and Terra have had successful burns already. After Terra's burn the price hit an all time high. Ethereum is burning coins to create scarcity since there is no limit of Ethereum tokens.
Projects with insane amounts of coins in their supply, like Shiba Inu, could benefit from burning their tokens and getting rid of a huge chunk of the supply in order to raise the price of each coin in the circulating supply.
