Cryptocurrency Burning – What It Means?

September 17, 2022 3 min read

Cryptocurrency Burning – What It Means?

Cryptocurrency Burning – What It Means?

In a world where cryptocurrencies are recognized, the things that can be done with them are unimaginable. As most people know, cryptos can be invested or traded, depending on the holder. However, something else that can be done – it can be burned. Cryptocurrency Burning is a thing, and holders must know this, especially beginners. Find out more about it in this article.

What Does Cryptocurrency Burning Mean?

Cryptocurrency Burning is a situation involving the removal of coins or tokens by sending them to a wallet address, making them impossible to use for transactions. It eliminates such coin from circulation, and the wallet used is always outside the blockchain network. By doing this, a crypto holder can only use them to receive other tokens.

Ideally, users are given a wallet address (almost similar to an email address) to send and receive coins. However, in the case of burning, the wallet address will only be able to receive coins and not send them. This address is often called a burner or eater. And the difference between this address and the normal cryptocurrency wallet is that the private key is absent in the former and present in the latter. 

So, you can say that by cryptocurrency burning, tokens could be lost forever – never to come back into circulation.

What Are The Advantages and Disadvantages of Cryptocurrency Burning?

The real idea behind coin burning is to increase the price or value of tokens in circulation. Its objective is to regulate demand and supply and ensure the stability of the prices of cryptocurrencies. However, while this act has its advantages, it also has disadvantages.

Pros of Cryptocurrency Burning

One of the few benefits of cryptocurrency burning is to increase value. Similar to a concept in back stock purchase, some companies buy them to reduce shares in circulation while increasing the value of those available for their financial breakthrough. However, while there is yet concrete evidence on the fact that burning tokens increases a particular token's worth, it is considered a factor that could influence investors' decisions.

Another advantage of burning is to promote mining balance. First, a Proof of Burn (PoB) mechanism allows miners to burn virtual tokens and retain the right to write blocks in proportion to the value of the coins burnt. However, with this PoB, some miners have been able to ensure periodic burning of cryptocurrency to create a balance between early miners and new miners.

Cons of Cryptocurrency Burning

One of the cons of cryptocurrency burning is that it may have little or no effect on the price of tokens available on the market. At this point, the tokens sent to a burner have little or no value and won't always guarantee that those in circulation will be any different just because they are gone.

Another disadvantage is that cryptocurrency burning can be manipulated. You may think a coin is out of circulation, but it isn't and could affect those available or the investor – fraud is inevitable.

Is Cryptocurrency Burning a Good Idea?

Knowing the pros and cons of token burning is not enough; you also need to figure out if it is a good idea or not.

Well, one thing to know is developers only do coin burning. These are the only people that can do much to reduce the number of tokens in circulation and increase the price or value of others.

In a way, cryptocurrency burning is a good idea because it takes the same format as corporate stock buy-stacks. However, it would help if you understood that it is a risk in the end. It could backfire and affect the investor.

Eventually, the factors determining whether it is a good idea are the investors, holders' sentiments, and supply and demand dynamics with prices.

Reasons Why Companies Burn Tokens 

Significantly, investing companies burn tokens intending to reduce a particular token's supply and increase others' prices. However, according to one of the authors of Bitcoin and Ripple: "Cryptocurrency and Initial Coin Offerings (ICOs) investment is not the safest idea. However, everyone has different situations that could influence them to take certain risks. Therefore, it is important that before making any financial decisions, a professional should be involved first."

Conclusion

If you own a token or any cryptocurrency, being informed on every little thing is essential. You want to make great decisions regarding investing or trading, and the only way to do that is by understanding various situations. Crypto Burning is one such situation, and knowing that it is a method used to keep coins out of circulation might just be a good way to know what tokens are worth the investment.


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