Crypto coin burn is when crypto coins or tokens are permanently and intentionally removed from circulation in order to help elevate the price by decreasing supply.
The crypto market is driven largely by supply and demand economics
Unlike say the money supply which is backed by the government or a commodity such as oil or gold which has an inherent value, there is no such inherent value in crypto.
If Bitcoin were to collapse, there is no liquidation process where assets can be sold off in order to compensate shareholders and suppliers.
As demand and supply are the primary levers behind the price, more coins or tokens can be added to the supply which can bring prices down, or coins or tokens are permanently destroyed “burned” in order to drive the price up.
What is a crypto coin burn?
A crypto coin burn is the intentional permanent destruction of a crypto coin or token by the development team behind the crypto.
The coin burn removes the desired amount of crypto tokens or coins from circulation.
It is as permanent as taking a big wad of Euro notes, wildly spraying them with gasoline and setting them on fire.
Once those notes are burnt, they are totally unusable and out of circulation.
Well, the same happens with a coin burn, without the gasoline and fire of course!
What is the purpose of a crypto coin burn?
There are a couple of primary reasons why coin burns take place.
One of them is to help maintain/stabilise the price of a stablecoin.
Stablecoins are generally pegged to a fiat currency like the US Dollar or to a valuable commodity such as gold or they maintain their price using an algorithm.
If the price of the coin or token were to fall beyond a certain level a coin burn would take place which would lead to the price going up to the desired price point, for example, to match the price of the US Dollar due to the decreased supply.
Naturally, the reverse happens should the price be too high, more coins or tokens would be added to the supply.
A further reason for coin burns is to help push the price upwards by removing coins or tokens from the available circulation.
The decrease in supply makes each coin more valuable and therefore more attractive to investors.
Corporations employ a similar technique known as a share buyback, where they are reducing the supply of available shares in the market in order to drive the share price up.
The key difference is that the shares are not being destroyed, but rather reabsorbed by the corporation.
The end goal is very much the same though.
To reduce the supply in the open market and drive the share price up.
Another example of a similar dynamic is the supply of oil into the market. If the price of a barrel of crude oil drops below a certain level, the oil-producing nations will often restrict supply in order to drive the price back up in order to maximise their profits.
How does crypto coin burn work?
A crypto coin burn is a totally transparent process and anyone can verify the coin burn on the blockchain.
As dramatic as it may sound, there is no fire or actual burning involved, it’s all happening in the digital realm.
A crypto coin burn occurs when a predetermined amount of coins or tokens are sent to a special address also known as an “eater address”.
Nobody has an access key to this address, not even the developers and once the coins or tokens have been transferred there, there’s literally no way of getting them back.
Think of it like a safety deposit box where you can push valuables in, but you have no way of opening the box to take anything out.
The valuables remain there. Now, in the case of the safety deposit box, it’s still somehow possible, for example by opening the box by force, no such possibility exists in the crypto world.
The coins or tokens are technically still accounted for but not available for use.
It’s worth remembering that coin burn is intentional, it is different to situations where coins or tokens are accidentally sent to the wrong address or a person loses access to their wallet after they have lost their private key and those coins or tokens are no longer retrievable.
The crypto world is brutally clear and very unforgiving when it comes to lost coins, burned or otherwise.
A couple of high profile coin burn examples
Ethereum, the second-largest crypto after bitcoin undertook a major coin burn event, burning through an eye-watering $144m ETH in 2021 following major network upgrades.
ETH was being burned at a rate of 3.15 tokens or around $10,000 per minute. Another different coin burn event was by the founder of Ethereum as it happens, Vitalik Buterin.
In this case, it was a Dogecoin, Shiba Inu. Vitalik burned a staggering 410 trillion SHIB, 90% of what was in his wallet, this drove the price up 40%, as the coins Vitalik burned represented about 40% of the total SHIB supply.
In this case, his motives were different, but, the end result was as expected, the removal of a significant number of coins from circulation, made the remaining coins more valuable, well, for some time at least.
Conclusion
Demand and supply dynamics drive the crypto market, pure and simple.
As non-stablecoin crypto typically does not have an inherent value and is not generally backed by anything or anyone, there are not many levers that can be intentionally pulled to somehow control the price.
Coin burning is one useful lever available to all crypto coin developers and also communities.
By reducing supply via a coin burn event the price can be artificially driven up thus making existing coin and token holders happier and making the coin or token more attractive to new investors.