What Does Coin Burning Crypto Mean?
What does coin burning Crypto (crypto) mean? One of the most interesting discussions in the cryptocurrency world is the burning phenomenon. Not infrequently, this digital currency burning event becomes trending on Twitter.
People flocked to monitor the movement of the coins that were about to be burned. So, what exactly is this coin burning? What are the effects on the assets owned? And what should be done when the burn event takes place? Eits, calm down. In this article, we will thoroughly explain crypto burning. We will discuss the definition, purpose, until when the event is usually held.
What Does Coin Burning Crypto Mean? What's the Purpose?
Crypto burning can basically be interpreted as a permanent reduction in the number of crypto coins.
Because crypto is a digital currency that is decentralized, of course the reduction is not carried out through institutions such as state banks. Crypto burning is done by sending coins to a wallet address that only functions to receive. Thus, these coins can no longer return to circulation.
For easy understanding, imagine you are sending money to an account number. However, this account number cannot be used to send money at all. So that no matter how much money is sent, it will definitely be lost or will not be able to come back again.
How to Burn Crypto?
Burning digital currency can be done in several ways. First, the developer will purchase coins that have been sold to the public. The coins that are sold are then burned to a special wallet address.
Second, the developer will burn coins from the fees earned to pay for transactions. This second method is applied to Shiba Inu to reduce inflation.
What is the Purpose of Crypto Burning?
Above, it has been explained what coin burning crypto means. Regarding the goal itself, there are at least 7 main reasons why this event was held.
- First, crypto burning as part of the agreed protocol management. In other words, event burn was planned from the very beginning when the coin was created. For example, BNB has a burn schedule per quarter of a year. This schedule will continue until the supply of BNB is only 100,000,000.
- Second, burn crypto to increase demand and drive up prices. For example, the burn conducted by XLM in 2019. The burning was carried out at 50% of the coin supply and was intended to increase demand.
- Third, burn to protect against DDOS or Distributed Denial of Service attacks. DDOS occurs when a lot of spam causes very slow transactions. So that the transaction can continue to run well, the transaction fee is then burned.
- Fourth, to pay transaction fees. Take, for example, Ripple. When you transact with Ripple, part of the transaction will be burned as part of the payment.
- Fifth, to burn unsold coins. Apart from continuing to try to sell coins that are still stored, the developer also has the option to burn these coins.
- Sixth, maintain a stable coin value. To maintain the value of a stable coin like USDT, burning can also be done. For example, if the demand for a stable coin falls so that the price weakens, a burn can be done so that the stable coin price will rise to its original value.
- Seventh, overcoming inflation. Some developers deliberately burn their coins to reduce inflation.
What Does Coin Burning Crypto Mean to Cause Asset Holders to Disappear?
Burning crypto generally will not cause your assets to disappear. Because the burn is carried out by the coin owner company with a buy back mechanism. It's just that, with the burn method as a transaction payment, of course your assets will be reduced by the amount of fees that must be paid.
Can Burning Crypto Make Prices Rise?
As explained in the definition of what coin burning crypto means above, the main impact of doing this event is to reduce the number of coins. For example, XRP or Ripple, which has now reduced its supply by 7%. Based on data compiled from the Ripple network, at least 18 billion coins have been burned since 2013.
However, during or after a burn is carried out, special effects will usually appear, such as an increase in crypto prices. What needs to be remembered, burn does not automatically increase the price of the digital currency.
It's just that when burn occurs, people will start to be interested in buying because they believe in the principle of "scarity". On that principle, it is believed that the fewer goods, the more expensive they are.
Some people also think that when the market capitalization remains constant and the number of coins decreases, the price per coin will automatically increase. For example, the market cap of coin A is 2 billion US dollars while the number of coins is 200 million. Thus, the price per each coin A is 10 dollars. When the number of A coins is burned, many people think that the price will automatically increase.
Even though in certain cases, burning crypto actually has a negative impact. Because the demand is decreasing. Thus traders and investors need to be careful in responding to this event.
Types of Burning Crypto
In order to understand what coin burning crypto means, let's look at the types of burning in this digital currency.
#1. Burning at the Protocol Level
This type of burn is carried out with the Proof of Burn mechanism which is indeed found in the coin protocol. PoB has a mechanism like PoW (Proof of Work) but is more efficient. Developers interested in anticipating DDOS attacks generally also implement this type of burning.
#2. Burning as an Economic Decision
The second type of burn is carried out with economic motives. For example, to increase prices or overcome inflation. For example, burning ICO tokens. The developer decided to burn the unsold ICO to maintain the coin supply so that the price does not fall.
#3. Event Burning as a Substitute for Dividends
Burning digital currency can also be done as a substitute for dividends. For example, to provide rewards to coin holders, developers can buy coins that are already on the market and then burn them to increase the price of the digital currency.
Pros and Cons of Burning Crypto
Studying what coin burning crypto means is certainly not complete before talking about its advantages and disadvantages. The advantages of this event itself are:
It is proven that it often increases the value of the coin, although sometimes it is accompanied by a weakening.
Can help control inflation, especially in stable coins.
The PoB method can protect the network from hacker attacks.
While the drawbacks are:
Burning does not have serious long-term effects. Coin price increases are short-term.
Vulnerable fraud. Unscrupulous developers may not actually burn their coins. They just keep the coin in a certain wallet and then enjoy the price increase after people buy it.
If it's not done professionally and transparently, coin prices can actually fall because investors don't trust the developer.
What Does Coin Burning Crypto Mean to Watch Out for?
Does burning digital coins need to be watched out for? Or just go with the hype on the pitch?
The answer depends. As mentioned above, burning can increase prices but can also be a land of fraud. Our advice:
- Take advantage of the momentum. Take the opportunity to buy coins to be burned and then resell them once the price goes up. But don't linger. If you are interested in investing, consider other factors that are more comprehensive.
- Check the credibility of the coin developer including its track record. If in doubt, it's best to ignore the ongoing burn event.
- Learn the burn history of the coin. If the results are consistently good, there's nothing wrong with taking advantage of profit opportunities.
What Does Coin Burning Crypto Mean to be a Good Thing?
Burning digital currency can be a good thing or a bad thing. As part of implementing protocol management or preventing DDOS attacks, of course this mechanism is a good thing. However, if the developer commits fraud, of course this event will be a bad thing for traders and investors.
When is the Crypto Burn Schedule?
Crypto burning is carried out according to the calendar set by the developer. As explained earlier, there are developers who have a special schedule, but some who don't. So it's a good idea, you listen to the latest updates about coins that will soon be burned.