Burning cryptocurrency coins and how it affects the value of tokens
As you know, one of the main factors influencing the value of an asset is “supply”. In the case of cryptocurrencies, this is the number of coins that are present on the market.
At the same time, it is easy to notice a consistent pattern - the fewer coins in circulation, the more expensive the cryptocurrency is.
For example, at the moment, there are 19.7 million bitcoins in circulation at a cost of $63,000, but the same Shiba in circulation is 14.5 billion and the coin costs only $0.00002.
In order to influence the rate of an asset, developers often burn coins, removing millions or even billions of tokens from circulation.
The essence of the process is that the authors of the project send part of the coins to an address to which there is no access, thereby removing them from circulation.
There are various methods of burning coins: manual burning by the project team, burning through smart contracts, burning part of transaction fees.
Why is cryptocurrency burning carried out?
The reasons for such actions may be:
- A decrease in supply - the removal of some coins from circulation leads to an increase in value due to a change in the ratio of the number of coins and total capitalization.
- Inflation management – combustion is one of the mechanisms for managing inflation. Cryptocurrencies, like regular money, are subject to inflationary processes, and a decrease in the number of coins in circulation is intended to increase their purchasing power.
- Marketing ploy - everyone knows that burning cryptocurrencies leads to an increase in their value, which means they start buying coins. Increased demand stimulates price growth.
How does burning cryptocurrency coins affect the price?
It is generally accepted that removing coins from circulation has a beneficial effect on the value of the asset.
For example, there are 1 billion Lokhcoin coins in circulation with a capitalization of 10 million at a cost of $0.01 per coin. A decision was made to burn 500 million coins, leaving 500 million in circulation with a total value of the same 10 million. Taking into account capitalization, the price doubles to $0.02 per coin, and due to increased demand it can rise even higher.
Unfortunately, this principle does not always work and burning coins does not guarantee a price increase.
It all depends on factors such as the number of coins in circulation, the number of burned coins and the liquidity of the cryptocurrency.
No matter how much Lokhcoin is burned, a coin with this name is unlikely to attract the attention of investors; if there is a rise in price, it will be limited by the current capitalization. And often the price of low-liquidity assets rolls back to their previous value, despite the decrease in the number of coins.
Therefore, when assessing the news about the upcoming burning, one should take into account how popular the cryptocurrency is with investors and whether the process will be able to increase demand for coins.
The percentage of coins burned from their total number in circulation also plays an important role. For example, if there are 2 trillion coins in circulation, and a decision is made to remove 1 billion from circulation, which is 0.05%, then such a step is unlikely to significantly affect the price.
It is generally accepted that the removal of more than 1% of coins from circulation has a significant impact.
The effectiveness of coin burning as a tool to influence the cryptocurrency rate is a matter of debate among experts. For this reason, it is recommended to conduct your own research before investing in cryptocurrency projects immediately after the news of the burning of some coins comes out.