Cryptocurrency prices are constantly subject to volatility. It’s almost impossible to keep prices stable for an extended period unless it’s pegged to a real-world asset like stablecoins are.
Many external sources influence cryptocurrency prices, and no creator can deal with all of them at the same time. However, one source rules them all.
The classical law of supply and demand surpasses all others. And with its help, the developers of a given cryptocurrency can smooth out the volatility.
That’s either by artificially increasing the supply or by burning reserves.
But how exactly does burning affect crypto’s price? Does it increase token value in any way? Let’s take a look!
What does “Burning Crypto” Mean
Coin burn, or crypto burn, refers to an action when a part of crypto is taken out of circulation—permanently destroyed. This is typically done by sending those tokens to a burn address, thus a wallet address, from which no one nor the creator cannot retrieve them. After all, it wouldn’t make sense to not permanently destroy them.
If you ever forget your private keys, you have actually burned the tokens yourself. Because you took them out of circulation. But crypto burning refers more to the deliberate removal of the reserve from circulation rather than accidental.
The goal of crypto burning is to reduce the overall supply with the motivation of increasing the price of the remaining tokens. As the law of supply states, as the supply of the token decreases, its rarity increases, and so does the price.
But why would anyone want to destroy cryptocurrency and not let the market handle it?
Does Burning Crypto Increase Token Value?
One of the most significant factors influencing the price of cryptocurrencies, and any market in the market economy, is supply and demand.
The supply and demand balance can be thrown off easily.
If a coin has an unlimited supply, it’s hard to drive the price upwards since anyone can wait for more coins to be created.
Or on the contrary, when most of the coins are held by a few investors, there is a huge scarcity, and the price can skyrocket if the asset is somewhat useful, of course.
Neither situation is ideal, and it is the first situation of coin oversupply that cryptocurrency burning is trying to solve.
Crypto burning can help to reduce volatility and help a coin’s price to recover. Because as stated before – lower supply -> higher demand -> an increase in value. It sounds like an excellent plan, but does it really work that way?
How to make token burn working
First of all, let’s set some assumptions under which it can all work.
Crypto burn is meaningless if a cryptocurrency has only a small number of accounts holding a large percentage of a coin.
Crypto burn is also meaningless If the token code allows developers to create more tokens at any time.
The only case where burning crypto is useful and can increase the token value is for tokens with many holders and low pre-mined distribution. And a significant number of tokens must be burned.
Even after that, there is no certainty that the cryptocurrency price will increase. Reducing the supply of tokens will only drive the price up if there is sufficient demand for that coin at that price. The price won’t go up if nobody wants to buy your token.
However, no evidence burning cryptocurrency tokens does increase their value. At least not directly.
The action of crypto burning can influence investors’ and users’ sentiments, either driving the prices up or dragging them down.
In conclusion, it’s more a question of the token’s utility and investors’ plans rather than a direct link between token burning and its price.
Which Cryptos Burn Tokens
Quite often, cryptocurrency burning is associated with so-called Reflection Tokens. A reflection token (sometimes referred to as a reward token) is any token that rewards its holders by adding new crypto to their wallets. Reflection is financed by taxing network transactions. I.e., on every transaction, there is a small percentage transaction fee that is redistributed to investors. And a bit of that goes into the liquidity pools. And if there is a need to decrease the supply, a part of liquidity pools are burned.
We’ve got a more in-depth piece on Reflection tokens if you’re looking for a thorough explanation.
But in addition to this, several other coins regularly burn part of their reserves.
Binance Coin (BNB)
Binance (BNB) coin features quarterly auto-burn when a portion of the total supply is burned. Because it is an auto-burn, the amount is based on price and the number of new blocks created on the Binance Smart Chain during that period.
The first BNB auto-burn was in October 2017, when 0.49% of the total supply was burned.
In addition to the quarterly auto-burn, a portion of gas fees are burned on every transaction done on the Binance Smart Chain. In total, 100 million BNB will be burned.
Stellar (XML)
Stellar doesn’t feature auto-burn or repeated burning. But back in 2019, Stellar developers burned 55 Billion tokens worth $4.7 billion.
Since this happened more than three years ago, we can use this to demonstrate whether burning crypto increases the token’s value or not.
The XML burn happened at the moment illustrated in the graph above. As you can see, the price barely moved. And the trade volume as well.
Shiba Inu (SHIB)
In 2021, Ethereum’s co-founder, Vitalik Buterin, received 50% of Shiba Inu’s total supply from its creator. A vast majority of it was burned, and the rest was given to charity.
More importantly, however, it kicked off regular token burning. And on average, 50 million tokens are now burned daily, regulating meme coin’s supply.
Conclusion
Crypto burning is when a part of crypto is taken out of circulation—permanently destroyed.
However, burning crypto doesn’t guarantee to increase the token’s value; it can keep its supply under control.