The practice of Coin Burning is common in the crypto industry and is quite simple to implement. Many projects use coin burning to preserve their assets supply and demand ratio. Reducing the total volume of coins, theoretically, leads to their value increase, provided that current demand indicators are maintained.
In this article, we will elaborate on what coin burning is, which projects use this practice and whether you can profit from it.
What is coin burning?
Coin Burning is a process of intentionally “burning” or destroying coins, which makes them unusable. This is achieved by sending coins to a certain address where they “burn”; recording this transaction on the blockchain proves that the user or development team actually burned the coins.
These addresses are often called “black holes” because private keys to these addresses are out of anyone’s reach. Therefore, any coins sent to this address cannot be restored and cannot be used.
Buyback is a well-known term in economics. It is also known as share repurchase when a company buys its outstanding shares to reduce the number of shares available on the open market. This strategy is meant to increase the value and reduce the circulating shares’ volume. Coin burning is notably similar to the stock repurchase process and has the same goals. That is, the smaller the total number of coins, the higher their future value is.
Regardless of how coin burning is executed, it usually acts as a deflationary mechanism. Most projects use it to stabilize asset value and incentivize investors and traders to hold their coins.
Reasons for and examples of coin burning
There are various reasons for coin burning, and they vary depending on the team’s goals. Some will use non-recurrent burning after completing an ICO to take unsold coins out of circulation. Others prefer to burn coins at certain time intervals periodically. But the main goal is to reduce the number of available tokens and remove them from circulation.
Coin burning after ICO
ICO projects often set the number of tokens available for sale. To this end, developers are introducing a coin burning mechanism for tokens in excess. That is, if the project fails to achieve its crowdfunding goal and some coins remain on the company’s wallets, the most natural solution for the developers is to burn the unsold coins. This highlights the project’s transparency and adds to the investors’ confidence in the product as they are ensured that the team only utilizes the funds raised to develop the project and does not plan to speculate on the rate.
For example, after the Neblio ICO, the team was forced to reduce the number of coins, since most of them were not sold. The team had to burn almost 80% of NEBL tokens. The entire Neblio blockchain system benefited from this, but financial benefits were reserved solely for the investors.
Coin Burning — Binance Coin (BNB)
The burning of Binance Coin (BNB) by the Binance exchange is often discussed in the crypto industry. The Binance exchange burns coins every quarter, artificially reducing the asset’s supply and increasing long-term supply and demand ratio. The Binance fund’s reserves (80 million, or 40% of the total supply), as well as tokens received as a commission by the exchange, are allocated for burning.
Binance’s goals for burning BNB tokens were spelled out in the project’s Whitepaper. They aim to ultimately halve the total supply of BNB (from the initial 200 million to 100 million).
After ten quarterly token burning procedures, the asset’s supply decreased from 187,536,713 BNB to 155,536,713 BNB. Hence, more than 55.5 million BNB tokens, which are planned to be burned quarterly, reducing the number of tokens in circulation. This is aimed at increasing the value of each BNB token in circulation.
On the day of BNB tokens burning, the price rose from $17.17 to $18.03 but soon dropped back to $17. The burning did not affect the asset’s price.
Coin Burning — TRON (TRX)
Absolutely all markets are based on supply and demand; coin burning often leads to a strong reaction from the buyers. Thus, in late 2018 the founder of the TRON project, Justin Sun, announced the successful burning of ERC-20 TRX tokens, equivalent $800 million. The burning of Tron coins helped increase the cryptocurrency rate and add value to the tokens. Currently, there are 99 billion TRX tokens in circulation; since the launch of the project, their number has decreased by a billion. Later, the head of TRON added that burning helps restrain inflation and increases the value of tokens for the hodlers.
Coin Burning — Ripple (XRP)
The Ripple project burns coins as well; the concept of the project is wrapped around a capped amount of coins, which, according to the creators, will help avoid inflation. A unique mechanism was developed to achieve this; with each transaction, 0.00001 XRP is burned to execute Ripple’s strategy. It is a small amount today, but in 3–5 years, the value of the XRP token will increase significantly. Moreover, such an algorithm can protect the network and reduce the number of spam transactions.
Coin Burning — Stellar (XLM)
Here’s another prime example of coin burning: in early November 2019, Stellar Development Foundation’s (SDF) CEO Denel Dixon announced that the foundation burned 55B of 105B Lumen tokens issued on the Stellar blockchain. This event allowed the halving of the total number of coins. The burning of $4B worth of XLM tokens caused an increase in the altcoin’s price by 25%.
It is safe to say that this practice is beneficial since, in the long run, it yields significant profits.
As the examples above suggest, projects burn a certain amount of coins to maintain the asset’s price at the desired level artificially. This avoids depreciation of the coins, which are not used for a long time. If this strategy is neglected, the coins’ value tends to zero, and the project turns unprofitable.
Burning does not often lead to an immediate asset’s value appreciation, as it often destroys coins that have not been in circulation for a long time. But as the demand for coins increases over time, this can contribute to significant growth, and updating the previous highs can be achieved much faster.