Cryptocurrency coin burning and how it affects token prices

As is well known, one of the main factors influencing the value of an asset is its supply. In the case of cryptocurrencies, this refers to the number of coins available on the market.

It's easy to notice a consistent pattern: the fewer coins in circulation, the more expensive the cryptocurrency becomes.

For example, at the moment, there are 19.7 million bitcoins in circulation at a price of $63,000, but the same Shiba coins are in circulation at 14.5 billion and are worth only $0.00002.

To influence the price of an asset, developers often conduct coin burns, removing millions or even billions of tokens from circulation.

Coin burning, also known as burn, is the process of intentionally destroying a certain amount of cryptocurrency units.

The process involves project creators sending a portion of their coins to an address that is inaccessible, thereby removing them from circulation.

There are various methods of burning coins: manual burning by the project team, burning through smart contracts, burning a portion of transaction fees.

Why is cryptocurrency burning carried out?

The reasons for such actions may be:

• Supply reduction – the removal of some coins from circulation leads to an increase in price due to a change in the ratio of the number of coins to the total capitalization.

• Inflation management – ​​coin burning is one of the mechanisms for managing inflation. Cryptocurrencies, like regular money, are subject to inflation, and reducing the number of coins in circulation is intended to increase their purchasing power.

• It's a marketing ploy – everyone knows that burning cryptocurrencies leads to an increase in their value, which means people start buying them. Increased demand drives up the price.

How does burning cryptocurrency coins affect the price?

It is generally accepted that removing coins from circulation has a positive effect on the value of the asset.

For example, there are 1 billion Lokhcoins in circulation with a market cap of 10 million and a price of $0.01 per coin. A decision is made to burn 500 million coins, leaving 500 million in circulation with a total value of $10 million. Taking into account the market cap, the price doubles to $0.02 per coin, and could rise even higher due to increased demand.

Unfortunately, this principle does not always work, and burning coins does not guarantee price growth.

Here, everything depends on factors such as the number of coins in circulation, the number of coins burned, and the liquidity of the cryptocurrency.

No matter how many Lokhcoins are burned, a coin with such a name is unlikely to attract investor attention. Even if it does rise in price, it will be limited by its current market capitalization. And the price of low-liquidity assets often reverts to its previous value, despite the reduced supply of coins.

Therefore, when assessing the news about the upcoming burn, it is important to consider how popular the cryptocurrency is with investors and whether the process will increase demand for coins.

The percentage of coins burned relative to the total supply in circulation also plays a significant role. For example, if there are 2 trillion coins in circulation and a decision is made to remove 1 billion, which represents 0.05%, it's unlikely to significantly impact the price.

It is generally accepted that removing more than 1% of coins from circulation has a significant impact.

The effectiveness of coin burns as a tool for influencing cryptocurrency prices is a subject of debate among experts. Therefore, it is recommended to conduct your own research before investing in cryptocurrency projects immediately after news of coin burns is released.