As time goes on more and more people start to invest in cryptocurrencies with the hopes that prices will go up and give them very high returns. But there is one problem if you are a long-term holder, and it is the devaluation of tokens. Cryptocurrencies such as Bitcoin have a max supply, meaning that they have a limited supply and once the maximum amount of tokens is in circulation, there is no way to create more tokens.
But there are also cryptocurrencies that have an unlimited supply, meaning that they can be created whenever it is deemed necessary. So tokens can go into circulation continuously, and there might be a point when there will simply be an overflow of supply, causing the price to drop, as supply and demand will be very far apart. This can be looked at as a sort of inflation, and in order to combat this, blockchains started to use the crypto burn mechanism. But what is it exactly?
What is a Crypto Burn
Crypto Burn simply put is the process of removing cryptocurrencies from circulation forever. When people operating a cryptocurrency see that there is a surplus of tokens in circulation they use a mechanism called a crypto burn which decreases the circulating supply, which in return either stabilizes the price of the crypto or in some cases even increases it.
Looking at the term “crypto burn” you might think that cryptocurrency tokens are being burnt and removed from the blockchain, but this is not correct. If crypto has been minted on the blockchain, there is no way to remove it. Because of this, burning is done using a very simple but very effective method. Developers take a crypto wallet that can only receive cryptocurrencies, meaning it does not have a private key. Then they simply send the tokens they wish to burn to this address and since this wallet does not have a private key, tokens can not be transferred out, they just remain there indefinitely. Everything is confirmed using proof-of-burn mechanism algorithms, where all participant nodes agree to this burn and that there is no problem with it.
Are crypto burns good or bad?
When looking at crypto burns and what it brings to the crypto market, it might seem to be a good thing, but is it really? Crypto burns make it so that there is no surplus of tokens on the market, increasing the price of tokens and making sure that the token does not fall victim to inflation.
But there are ways some people might abuse this system. Some lesser-known tokens can claim to have burnt these cryptocurrencies, but they might have kept the security keys of the wallets, and when the price goes up they can then simply sell these burnt tokens alongside their holdings and take out huge profits. There is also a possibility that when tokens are burnt and prices go up, people might see it as a great opportunity to profit and start selling their holdings, making prices fall, which in the short run, will make the burn look ineffective, but in the long run it is all for the best.
FAQs on what a crypto burn is?
Where does crypto go when they are burned?
Whenever cryptocurrencies are burnt they are sent to a crypto wallet that doesn’t have a private key. What this means is that these wallets can receive crypto but no one can access them to send these currencies out again. This makes these tokens unusable and inaccessible, essentially burning them and removing them from circulation.
Can Bitcoin be burnt?
Bitcoin can most certainly be burnt, but the likelihood of that happening is very low. Since Bitcoin is limited in supply and is not operated by any single entity, no individual will be ready to give up their Bitcoin and burn it, especially since it is already considered a very low-supply crypto. So yes, Bitcoin can be burned, but probably never will be.