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What is coin burning?
Coin burning happens when a cryptocurrency token is intentionally sent to an unusable wallet address to remove it from circulation. The address, which is called a burn address or eater address, can't be accessed or assigned to anyone. Once a token is sent to a burn address, it's gone forever.
Anyone who owns a cryptocurrency can burn it, but it's not exactly something you'd want to do for no reason since you'd essentially be throwing money away.
Most of the time, it's the developers of a cryptocurrency who decide to burn a certain amount. Coin burning reduces the supply, making tokens of that cryptocurrency scarcer. That scarcity can lead to an increase in price and benefit investors.
There are a couple of caveats to mention about coin burning. It isn't guaranteed to increase the crypto's value. In fact, many see little to no benefit from it.
A cryptocurrency coin burn can be used to deceive investors. Developers can claim to burn tokens when they're actually sending those tokens to a wallet they control. To avoid this, it's important to do your research on the crypto you're investing in or stick to safer cryptocurrency stocks.
Developers also burn tokens as a way to hide whales who hold large portions of a cryptocurrency. Let's say a developer launches a cryptocurrency with 1 billion tokens, keeps 100 million, and immediately burns 600 million. It will look like the developer owns 10% of the supply because the original supply was 1 billion. But the developer really owns 25% of the 400 million tokens still in circulation, which is obviously a much larger amount.
How did coin burning begin?
The idea behind coin burning dates back to well before cryptocurrency. It's very similar to, and likely inspired by, stock buybacks.
A stock buyback is when the company that issued the stock buys shares back at the market price and reabsorbs them, reducing the number of total shares in the market. While buybacks and coin burning aren't an exact match, they're similar concepts that can serve the same goals.
Coin burning started becoming popular with cryptocurrencies in 2017 and 2018 when multiple coins, including Binance Coin (CRYPTO:BNB), Bitcoin Cash (CRYPTO:BCH), and Stellar (CRYPTO:XLM) burned tokens to cut supplies and boost prices. More recently, it has been a common strategy with newer cryptocurrencies that start out with massive token supplies.
One of the main reasons coin burning has caught on lately is because it allows cryptocurrencies to start out at cheap prices and then artificially increases their value once people have invested. A new cryptocurrency can launch with 1 trillion tokens worth a fraction of a cent and attract investors because of the low price. Later, the developers can burn billions of tokens to raise the price.
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