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Thursday, August 11, 2022

What is Cryptocurrency Burning and Why is There a Need to Burn a Coin?

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Tanushree Pathak  HackerNoon profile picture

Tanushree Pathak

I am a HR turned writer. With immense patience and dedication, I am strongly moving forward with my writing career.

Users of cryptocurrency are given an address that they can use to send and receive coins. Consider the address to be similar to an email address. You can send and receive emails from that email address from any location where you have internet access. A cryptocurrency address is similar in that the cryptocurrency network recognizes it as yours and uses it for transactions. This is the location of your wallet.

When a coin is being sent to a wallet address that only can receive coins, it is “burned.” These are also known as “eater” or “burner” addresses. Cryptocurrency wallets have private keys that allow the user to access the tokens stored in them; nevertheless, there is no private key for burner addresses, this indicates that the tokens are gone forever.

Source: Financial express

Is it a gimmick?

Coin burning is not a new concept. However, this has recently received a lot of attention as a result of the recent London Hard Fork upgrade to the Ethereum network. Every minute, approximately 3.17 ETH is burned as a result of this upgrade. To put this in context, the average price of ETH in the previous seven days was $3200. This equates to more than a half-million dollars in ETH being burned every hour! Such news grabs people’s attention more quickly.

Token burning can be compared to a company buying back its stock. In this manner, the shareholders receive “returns value” from the company. To accomplish the same goal, cryptocurrency projects burn their tokens.

It is not necessary that the price of the token rise overnight. Other news about the token can sometimes overshadow the impact. Alternatively, investors may anticipate a token burn and “price it in” at an earlier stage. Nonetheless, burning tokens tends to support an asset’s price in the long run and is considered a positive move.

Token burn can even benefit those staking tokens in a proof-of-stake protocol by validating transactions. When a large number of tokens are removed from circulation, there is a good chance that their staking rewards will be worth more in US dollars.

Some projects have burning events built into their code on a regular basis. The goal here is to reassure potential investors that the token’s future supply will continue to shrink, alleviating concerns about inflation or an overly diluted market. As a direct consequence, this practice can enhance a token’s appeal as a “store of value.”

Coin burn impact on market

Prof. Prasad stated that the outcome of coin burning has yet to be proven . However, the burn process should theoretically equalize the prices/markets.

On the other hand the verdict on the implications of the burn procedure on the cryptocurrency market is still out. Bitcoin gained value in the instant aftermath of its last coin burn. Burning BNB tokens, on the other hand, did not result in any significant dividends for that currency. It is  believed that the lasting viability and stability of a cryptocurrency market is more influenced by the potency of the currency itself . Coin burn, on the other hand, has a place in putting up the currency and demonstrating the promoters’ commitment to the currency.

In the very same manner that different fiat currencies, such as the US dollar, Indian rupee, and British pound, have inherent strengths, different cryptocurrencies, such as LCX token, Bitcoin, TIA Token, and Ethereum, have their own strengths.” The impact of central banks’ policies on currency stability varies. When you extrapolate that to cryptocurrencies, you will get to know that various currencies react to Coin burn in their very own distinct ways.

The impact of coin burn on investors

According to Prof Prasad, the coin burn process is vital for two reasons. – First, investors benefit from improved valuation.

Second, the coin burn process informs investors that in the absence of regulators, prices will be stabilized through self-regulation.

In conclusion, there are many valid reasons for tokens to be burned, but once you’re prepared to invest on a new altcoin that appears to have a high upside potential, the burn methodology and reasoning used by the team the developed tokens must be considered, and if they don’t seem quite right, it may be a sign that you should find another crypto to invest in. 

by Tanushree Pathak @tanushree.I am a HR turned writer. With immense patience and dedication, I am strongly moving forward with my writing career.

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