If you’re new to crypto, crypto burning might sound to you like something John Wick would do to his enemies’ secret money stash with a flick of his finger, but in reality, crypto burning includes less malice and no flames at all.
Burning cryptocurrency is akin to removing cryptocurrency tokens from circulation – forever. The concept is known as burning because the method for removal includes sending the cryptocurrency tokens to a burn address on the blockchain. A burn address has no private key and can’t be accessed by anyone, therefore the tokens in the address are effectively lost forever. When a given amount of cryptocurrency is burned, the total supply of the token is automatically reduced.
In this article, we’ll take a look at why and how people burn cryptocurrency and what it means.
How Do You Burn Cryptocurrency?
As you may already know, most cryptocurrencies exist and operate on blockchains. Blockchain technology allows users to make crypto transactions with other crypto holders without a third party or mediator. That is because every person can directly access their blockchain-based assets through digital wallet addresses and private keys. Wallet addresses are like destinations for crypto transactions – you can think of them as account numbers.
Private keys, on the other hand, are like passwords that unlock the account and allow people to control the assets within.
Usually, when we want to make crypto transactions, we have to make sure the address we are sending digital assets to is a valid address that belongs to the receiver. That way, transactions can be completed without a hitch. However, sometimes people store and send digital currencies to wallets without private keys: the private keys might be lost or intentionally destroyed. In these cases, the digital assets are effectively burned because there is no way of recovering them without the private keys of the wallet.
These addresses are known as burner or eater addresses. The cryptocurrency in an eater address is like a treasure chest swallowed by a deep-sea whale: it’s lost forever.
How Did Coin Burning Begin?
In the early years of the cryptocurrency era, coin burning was mostly accidental: people would store digital assets, especially Bitcoin, in a wallet they would later lose access to. At this time, the importance of keeping private keys secure hadn’t really sunk in, and many lost their private keys, along with their Bitcoin, due to computer crashes or misplaced hard drives.
These days, crypto burning has become a strategic way of driving the price of cryptocurrencies up. Since the ICO (initial coin offerings) boom in 2017, cryptocurrency companies regularly burn tokens in order to decrease the total supply of tokens in circulation. Since burning digital assets reduces the total supply of cryptocurrency in circulation, crypto burning introduces artificial scarcity to the equation. It’s a classical play on the supply and demand dynamic: when you reduce the supply, the prices may increase even if the demand doesn’t.
Reducing supply to introduce scarcity isn’t exactly a new idea. In fact, many companies often use this tactic to increase the value of their shares. When companies buy their publicly issued stocks back, they reduce the number of available shares in the market, increasing the value of the existing shares. That is why coin burns are often likened to stock buybacks.
Coin burning has become a commonly used strategy for increasing the value of cryptocurrencies. Binance Coin (BNB) and Bitcoin Cash (BCH) introduced regular coin burnings, setting a trend that would soon be followed by many other cryptocurrency projects.
Why Do Cryptocurrency Companies Burn Coins?
Coin burning has become a popular strategy over the years that many new cryptocurrencies frequently utilize. When cryptocurrency projects launch, they often introduce a massive number of tokens to the crypto market, at a very cheap price. Once the cryptocurrency gains a following, developers can burn a portion of the supply to quickly increase the value of the remaining tokens.
Of course, there is no guarantee that coin burning will actually improve the value of the cryptocurrency directly. In theory, decreasing the total supply should increase the price of the remaining cryptocurrency but in reality, the value of a cryptocurrency is always tied to its strengths as a digital asset, and investor confidence. Coin burning is by no means a direct formula for increasing value.
In fact, cryptocurrency coin burns can be used to manipulate investors. If the cryptocurrency project isn’t transparent and trustworthy, it’s possible that the “burned tokens” will actually be moved to a cryptocurrency wallet controlled by the developers.
Another way in which cryptocurrency token burns can be used to deceive investors is by simply omitting information. For example, developers can suggest they have only 10% of the total supply of coins at the beginning of a project, but coin burnings could increase their final holdings to 30 or 40% of the remaining total supply.
What Is Proof-of-Burn?
Cryptocurrency blockchains use consensus algorithms to execute transactions without mediators. The nodes in a cryptocurrency network validate cryptocurrency transactions based on consensus algorithms, instead of outside controls. Consensus mechanisms prevent double-spending and make sure all transactions on the blockchain are valid.
The most common and popular consensus algorithms in use are the Proof-of-Work (PoW) and Proof-of-Stake (PoS) algorithms. Proof of Burn is a newer consensus algorithm, one that allows miners to burn cryptocurrency tokens in order to add new blocks to the blockchain.
Proof-of-Burn is like Proof-of-Work in some ways: In Proof of Work, miners hash numbers in order to be able to mine new blocks. Hashing gets harder as the network grows in capacity, causing miners to spend enormous amounts of energy on mining. Proof-of-Burn is more energy efficient: miners only have to send their coins to a burn address. In exchange, they are rewarded with new crypto rewards.
The PoB system works to eliminate the advantage of early adopters: With PoW, early miners can easily mine hundreds of new tokens whereas latecomers will struggle to mine a single token. PoB-based cryptocurrencies regularly burn coins to keep the mining difficulty balance steady. With Proof-of-Burn, the more coins you burn, the more coins you can mine. This prevents early adopters and large coin holders from controlling the majority of the coin supply.
Which Cryptocurrencies Can Be Burned?
While fiat currencies are inflationary, most cryptocurrencies are deflationary. That means the value of fiat currencies falls when more banknotes enter circulation in time. However, since cryptocurrencies have a maximum total supply, the value of cryptocurrencies typically increases when their total supply is reached. Many altcoins regularly burn cryptocurrency coins in order to drive prices.
Technically, you can burn all blockchain technology-based digital assets simply by sending tokens to a burn address. Some cryptocurrencies have established special burning mechanisms, like burn wallets that are activated by smart contracts.
Binance, the cryptocurrency exchange behind Binance Coin (BNB), started to burn its BNB token supply in 2017 and has continued to execute quarterly burns ever since.
The Shiba Inu “joke coin” also gave half of its total supply to Ethereum (ETH) co-founder Vitalik Buterin in 2021. Buterin burned 90% of the Shiba Inu he received, and donated the remaining 10%, triggering a price increase for the cryptocurrency.
How Many Bitcoin Have Been Burned?
Bitcoin has a maximum supply of 21 million BTC. However, the circulating supply of Bitcoin is much less than this amount because of all the burned Bitcoin. According to blockchain experts, 2 to 4 million BTC remain in inactive wallets and haven’t moved in years. That means that almost 20% of all Bitcoin supply is effectively removed from circulation.
A Few Words Before You Go…
Crypto burning has become a popular strategy for decreasing the circulating supply of cryptocurrencies. Developers can decrease the number of tokens available on the crypto market by sending cryptocurrencies to a burn address where they can’t be recovered from. While this is often used by new cryptocurrencies to increase the price of remaining tokens on the market, it’s not a fool-proof way of increasing value.
In fact, crypto burning can be used to manipulate investors and enrich developers. On its own, crypto-burning is just a strategy that can be used by anyone. In order to understand whether crypto burnings are beneficial, you should always look at the big picture and consider the overall transparency and efficiency of the cryptocurrency in question.