The editorial staff of BeInCrypto tried to figure out why tokens are burned, and most importantly – what is the use of this for holders of cryptocurrency coins
Cryptocurrencies like Bitcoin, Ethereum, Litecoin and others are like regular money. They can be used to pay for goods or services, they can be stored for a rainy day, and you can invest in them. For example, people sometimes invest rubles in dollars or euros.
But digital currencies, unlike paper currencies – they are also called fiat currencies – have one important property – they are protected from inflation. This means that over time, coins do not depreciate, but, on the contrary, become more valuable. Projects use different methods for this. One of them is incineration.
What is burning
The name speaks for itself – cryptocurrency developers destroy some of the coins and thus reduce their number in circulation. As a result, they become more scarce and more expensive.
Thus, the projects protect coins from depreciation and reward those who are ready to buy and hold the asset as long as possible, because when they are burned, an artificial shortage of coins is created, and accordingly, their value increases. For example, at the end of February, the Crypto.com project burned 70 million coins, and the value of the token renewed its historical maximum.
In the stock market, companies use buybacks for these purposes. They buy up their own shares and withdraw their turnover.
How it works – an example from life
To understand how incineration works, compare a token to a postage stamp. Every year the Russian Post issues a set of collectible stamps. Each brand from this set exists in many copies. They are snapped up by philatelists for collections.
Now imagine that a fire broke out in the warehouses of the Goznak printing house, where the stamps are printed, which destroyed almost the entire issue. Only a test sheet survived. The cost of the surviving stamps will skyrocket, and philatelists will fight each other for life and death in order to get them into their collection.
The example is slightly exaggerated, but the essence does not change from this: the burning of tokens creates a shortage and excitement.
Who burns tokens
Most often, coins are burned by projects with unlimited emission to prevent impairment. Ripple and Stellar use burning to maintain the value of the coins.
Cryptocurrency exchanges also like to get rid of their own tokens. A striking example is the native Binance token – binance coin (BNB). When creating the coin, the developers decided that initially 200 million BNB would be issued, but then the emission would gradually be reduced to 100 million.To this end, the exchange spends 20% of its profits once a quarter on the redemption and subsequent destruction of tokens.
What to look for
In theory, the burning of tokens leads to an increase in the prices of the remaining coins in circulation. In practice, this only works if the token is in demand in the market and the project enjoys a good reputation.
If we continue the comparison with the mail, consumers are unlikely to be very worried if the circulation of mail envelopes burns out. It’s just that the mail will incur losses. It’s the same with tokens: an unknown project will not achieve an increase in the value of the coin, because people initially do not see value in it.
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