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What is Burn in Cryptocurrency?

What is coin burn, and how does it affect cryptocurrency prices?

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Have you heard the term “coin burn” and wondered what that means? In this post we will discuss how burning crypto affects the crypto market. In addition, we will discuss the most reliable and easy ways to invest in crypto as you will learn how burns affect the value and prices of cryptocurrencies. 

Coin burning or crypto burn is a mechanism that involves removing a particular number of crypto coins from circulation. A cryptocurrency is transferred to a digital wallet referred to as an eater address or burn address. This burn address wallet isn't accessible to anyone and there is no way to take the burnt coins back from the wallet.

The process of cryptocurrency coin burn is generally performed by the developers of a specific cryptocurrency asset. It may involve buying back the coins from the market and burning them. This act of burning the cryptocurrency lowers the supply, making it scarcer. As a result, the price of such a coin starts to increase, which benefits the investors. The crypto burn is a verifiable process, as the blockchain keeps the record of every transaction.

Coin burning is not a new concept in and of itself. The process of crypto burn is somewhat related to stock buybacks. There is a strategy where a company buys back its own shares from the market. This process reduces the number of available shares and increases each share's overall value.

Burn coins crypto summary

What Happens When Tokens Are Burned

The procedure associated with crypto burn is quite simple. Anyone holding a cryptocurrency can burn it. You just need to choose the number of crypto coins you want to remove from circulation. The selected coins or tokens are transferred to an address without a private key. Hence, it isn't possible to access the coins after they are burnt.

Additionally, it is also possible to verify that a specific number of tokens have been burnt. The most common method to burn cryptocurrency is sending such coins to the "Eater Address." The current balance of burnt coins is publicly available. However, no one is permitted to access these coins.

Crypto burn lowers the number of coins circulating in the market. So theoretically, this might increase the price of such a coin.

What is Proof-of-Burn?

"Proof-of-Burn" is a kind of consensus algorithm used by the blockchains to validate and add transactions. The PoB mechanism helps to prevent fraud and allows only valid transactions to pass through. Miners can burn cryptocurrency or tokens to mine new transaction blocks.

Cryptocurrency developers and networks have defined the procedure and protocols for a crypto burn. “Proof-of-Burn” is another reason why developers burn cryptocurrency. Token burning helps to create a consensus to verify transactions on the blockchain. It involves restricting the number of miners who can verify the number of burnt tokens.

Just like "Proof-of-Work," the "Proof-of-Burn" is also considered an integral part of the crypto world. By burning more tokens, new mining fields are created. The reduced token supply also minimises the number of miners. Hence, it requires fewer resources as well as lesser competition.

What are the Benefits of Burning Cryptocurrency?

Cryptocurrency burn is a deflationary system, which can affect the price of a token. It is something similar to the process of 'Bitcoin Halving', where the reward associated with mining the Bitcoin transactions is deliberately cut in half during the halving process. This results in halving the inflation rate of Bitcoin. As a result, the value of new Bitcoin that enters the market increases after the implementation of 'Bitcoin Halving.'

Crypto burn aims to restrict the supply and increase the value of cryptocurrencies. Here are some of the most common benefits of crypto burning.

  • It is a viable way to incentivise the holder of a cryptocurrency to keep it for longer
  • Crypto burning helps to enhance security by avoiding spammed transactions
  • Through the coin burn mechanism in crypto, it is possible to stabilise the value of a token even if there are no conventional regulators

Does Coin Burn Increase Price?

Coin burn is usually done to reward and incentivise cryptocurrency investors. In simple words: cryptocurrency coin burn is a way to affect supply and demand. As mentioned above, the main goal is to achieve a deflationary effect.

For instance, the reduction in the overall circulation of a crypto coin can trigger scarcity and boost its value. So, if you’re wondering whether coin burn increases the the price of a cryptocurrency, the answer would be 'Yes' in most cases.

Practical Applications of Cryptocurrency Coin Burn

There are numerous practical applications linked with a crypto burn. A few of these include:

● Ethereum's London Hard Fork update

● Maintaining USDT's Value as a Stablecoin

Ethereum's London Hard Fork update

On Aug 5, 2021, Ethereum got updated under "Ethereum Improvement Protocol" EIP-1599. It is known as the London Hard Fork update. The EIP-1599 is a part of a complete overhaul of Ethereum, the completion of which is expected by early 2022. Ethereum is now shifting to the "Proof of Stake" mechanism. Previously, this blockchain-based network relied on the "Proof of Work" mechanism.

As a result, users can exercise more power while verifying transactions and earn more Ethereum. Before this upgrade, only the miners could mine new coins by utilising extensive computing technology. As a result, even an entry-level miner can mine Ethereum. The London Hard Fork update will play a crucial role to control the unregulated supply and volatility of Ethereum.

The introduction of this upgrade will offer some relief corners to the investors by providing them options in terms of value and volume. The significant impact relates to the change in Ethereum's supply. It will also help to keep a check on the transaction fee.

The base fee paid in ETH will be burnt while performing a transaction. Hence more and more Ethereum would be burnt. It is a positive sign for the ETH holders, as this burning of Ethereum could lead to an increase in Ethereum's value.

Maintaining USDT's Value as a Stablecoin

On Oct 24, 2018, Tether burnt half-billion USDT. Many believe that the reason behind such a move was the dropping of the USDT below the $1 mark. Since USDT is a stablecoin, maintaining its stability is essential.

To maintain USDT's value, Tether removed a large chunk of its USD-backed cryptocurrency from the market. The coins were first redeemed and then passed through the crypto burn process. At that time, the supply of USDT in circulation dropped by approximately a quarter.

Although the company didn't confirm that there was a particular intention behind supply reduction, most people believe that it was a move to strengthen the USDT.

Earn Interest on USDT and ETH with Cabital

If you want to invest in USDT, ETH, or even BTC, Cabital Earn is a crypto interest account that lets you effortlessly earn with crypto, for both new and more sophisticated crypto investors. You can generate high returns on your crypto holdings, while ensuring your funds are protected by our internal security measures and investment strategy.  You can also invest in different sets of cryptocurrencies to maximize your rewards by diversifying your portfolio.

You can earn leading interest rates on USDT (Tether), the first stablecoin in the crypto market. Tether is an ideal choice if you want a stable investment option in crypto.

Similarly, Cabital Earn also offers a reasonable APY on Ethereum (ETH). Ethereum plays a crucial role in Decentralised Finance (DeFi) protocols. Furthermore, developers use ETH to create crypto tokens and Decentralised Applications (Dapps). Currently, ETH is the second to BTC, and keeping this position for a while now. With updates in the Ethereum protocol, it is more likely to continue being among the top cryptocurrencies and increase in value. If you want to start investing in ETH or other cryptocurrencies, head over to our Cabital Earn program and sign up now!

To get started, you can deposit euros and pounds via SEPA, Faster Payments and Plaid, and convert these to a cryptocurrency of your choice with Cabital.

This article has been prepared by Cabital Fintech (LT) UAB  (the “Company”) and is general background information about some of the Company’s activities at the date of this presentation.

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