If you follow the world of cryptocurrency, you may have come across the term "coin burning." This practice, which gained popularity in 2017, involves intentionally sending a cryptocurrency token to an address that cannot be accessed for wallet storage, effectively removing the token from circulation. In this article, we will dive into the concept of coin burning, its motivations, and its implications for investors.

What is Coin Burning?

Coin burning is a process where a predetermined quantity of a cryptocurrency's tokens is destroyed by sending them to an inaccessible address, also known as a burn address or an eater address. Once a token has been delivered to a burn address, it cannot be retrieved. This practice is usually initiated by the creators of the coin and is done to reduce the quantity of tokens in circulation, making them more scarce and potentially driving up their price in the market.

Why Do Developers Burn Coins?

The decision to burn coins is typically made by the developers of a cryptocurrency, and there are several reasons why they may choose to do so. One primary motivation is to create a sense of scarcity and increase the value of the remaining tokens. By reducing the total supply of a cryptocurrency, developers aim to make the tokens more difficult to obtain, which may lead to a rise in price, benefiting investors.

Another reason for coin burning is to conceal whales or users who control significant amounts of the coin. For example, if a developer releases a cryptocurrency with 1 billion tokens, saves 100 million for themselves, and then burns 600 million of them, it may appear as though the developer controls only 10% of the total supply. However, in reality, they may still possess a much higher percentage of the tokens, as the supply was initially set at 1 billion. This tactic can be used to create a misleading impression of the distribution of tokens and manipulate market perception.

The Origins of Coin Burning

The practice of coin burning has its roots in stock buybacks, a concept that existed before the advent of cryptocurrencies. Stock buybacks occur when a company purchases its own shares from the market at the current market price and absorbs them, effectively reducing the number of outstanding shares. While coin burning and stock buybacks are not exactly the same, they share similarities in their goal of reducing the total supply of tokens/shares available in the market.

Coin Burning in Popular Cryptocurrencies

Since 2017, coin burning has been employed by several cryptocurrencies to reduce their token supply and potentially increase their value. For example, the cryptocurrency exchange Binance conducts quarterly burns of its own token, Binance Coin (BNB), with the goal of removing 50% of the total supply from circulation. In 2019, the Stellar Development Foundation burned more than half of the total supply of Stellar (XLM), equivalent to 55 billion XLM coins. In 2021, the developers of Shiba Inu (SHIB) gave 50% of the available supply to Vitalik Buterin, the co-founder of Ethereum, in an attempt to attract attention to their project.