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Cryptocurrency: What is Crypto Coin Burning and How it Impacts Investors.

Shad Rohan
December 8, 2021

Introduction to Cryptocurrency

2020-2021 is one of the best years for cryptocurrency bulls. The cryptocurrency market has provided a whopping 3,300% returns within a year. It was a merit year for the cryptocurrency market. Moreover, within this time the market has seen the highest bitcoin short squeeze. According to Yahoo Finance, there were over $1 billion short liquidations in the cryptocurrency space on July 25' 2021. Bitcoin surged to $48000 on Binance and approximately $40000 on various other exchanges.  


After the breaking of the psychological figure of $30000, bears were confident of the fall. This created short positions at a very rapid pace. However, some institutional investors called for a short squeeze, and from $30,000 to $35,000 these short sellers started liquidating. 


Market news is primarily behind this sudden pump in the cryptocurrency market. Coins with a limited supply generally pump higher than the coins with an unlimited supply. An asset's price determination works on the basics of supply and demand, thus it is important to understand it before making an entry into the market. 

The demand and supply in the market determine the price of any asset. Similar to gold, various cryptocurrencies have limited supply and thus, their price shows increments. Companies behind the technology burn their tokens to limit the supply. 

15th BNB Burn | Quarterly Highlights and Insights from CZ | Binance Blog
Coin Burning


What Is Coin Burning? 

When cryptocurrency miners remove the token from circulation, it is called "Coin Burning". They do this to slow down the inflation rates or to reduce the circulating supply of the token. The current bull-cycle is following a trend similar to one in 2017. In 2017, all other coins other than bitcoin rallied. In this cycle, privacy coins like Monero and Dash witnessed a massive spike. 

Currently, coin burning is the hottest technology helping miners and institutional investors in pumping the token. 

How to accomplish token burning? 

After the tokens are mined, it is not impossible to control the supply. Thanks to blockchain technology, the nodes of all the tokens are interlinked. To remove coins from circulation, miners and developers simply send the acquired tokens to an unattainable address. These addresses do not have access to private keys. No one has the authority to use these tokens to make transactions. Burned tokens then become useless, and therefore they are considered out of circulation. This limits the supply of the token, and thus increases the price of the token. Although, supply is not the only factor to determine price movement. 

Background Of Coin Burning 

Coin burning concept is similar to an old financial market concept where publicly listed companies buy back their shares. The idea of coin burning is similar to the buy-back of shares. In the case of buy-back, the total number of shares circulating in the market is reduced. This is done to increase the fundamentals of the company. Share buyback increases the earning per share of the company. With fewer outstanding shares in the market, the net income to equity ratio increases. 


Need For Coin Burning 

The main objective of coin burning is to stabilize the price by regulating the supply of the coin. This is similar to demonitization and buy back of shares. Publicly listed companies buy-back shares from the market to limit the circulation in the market. It also improves Earning Per Share (EPS) of the company. 


Whenever the inflation in the country rises, the central bank of the country increases the interest rate. The excess money supply in the economy gets deposited into the banks, which in turn reduces the inflation rate. 

Such measures are taken to regulate the price fluctuation. The objective to burn tokens is the same. Theoretically, curbing the circulation of any asset increases its price. 


How The Bitcoin Halving Impacts Bitcoin's Price | by Igor | Coinmonks |  Medium

Halving of Bitcoins

For Bitcoins, the process of burning has another name and a more systematic process. The founder of Bitcoin, Satoshi Nakamoto, was aware of the problem of inflation associated with the existing currencies. Hence, he made a system of Bitcoin Halving to tackle this problem. 


During the process of mining, a miner is rewarded with a certain number of bitcoins when a block is filled. Initially, in 2009, every miner was rewarded 50 BTC for every block. However, Satoshi decided that there will be only a total of 21,000,000 Bitcoins in the world. Thus, the reward is halved after every 210,000 blocks. In 2012, after the first halving, the reward was 25 BTC. This cycle will continue till about the year 2140 when there will be no Bitcoins left to be rewarded. 


How Coin Burning/Halving Affects Prices? 

The theory of coin burning has not been proved yet. However, as per the theory, measures are taken to stabilize the price movement of any asset. The aftermath of bitcoin’s last halving was very drastic. Bitcoin gained value after the burn. 

On the other hand, Binance (BNB) coin burning didn’t result in price inflation. Experts believe that investors rely on the stability of the token. Clearly, Bitcoin is considered a more stable and reliable token as compared to the Binance coin. Coin burning does not affect every token in the same way. 


This is similar to that of fiat currencies. A developed nation’s currency overpowers a developing nation’s currency. Central banks make policies depending upon the nature of the currency. Different cryptocurrencies react differently to coin burning. 


How Do Investors Get Affected With Coin Burning/Halving? 

Investors simply get valuation benefits. If they are investing in the token for the long-term, then investors can enjoy the benefit of right valuation of the token. 

Secondly, investors can bet on the stability of the coin in future even without any regulation. Currently, the crypto market is not regulated by any institution and thus, is highly volatile. Burning or Halving of coins helps curbing the high volatility in the market.  

Shiba Inu Coin Burn

How Burning Coin Helped Shiba Inu?  - Around 41% Of SHIBA INU Tokens Were Burned 


As per the data curated by Etherscan, 41% of Shiba Inu tokens were transferred to a token without access to the private key. The address works like a black hole for tokens. The tokens once removed from circulation can not be used for any transactions. According to the data, around 10% of the tokens were bought by institutional websites such as crypto.com and Binance. 

Due to recent coin burning, the meme coin gained immense market value. The price of the token surged and it became the 9th most valuable cryptocurrency in the world with a market valuation of $37 billion.  The token surged approximately 145% in the last seven days. 

Coin burning was one of the major reasons for this sudden pump in the Ethereum based token. It was developed as an alternative to another popular meme coin known as the Dogecoin. 

Conclusion

All cryptocurrencies that are traded in the market can be burned, except Bitcoin, which is halved. The choice depends on the developer team of the token for coins other than Bitcoin. Sometimes, the community initiates token burning. Developers, investors, and miners understand the need of burning the token. It makes the supply of the coin scarce and increases the valuation of the token.  

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