Token burning involves removing a digital asset from circulation indefinitely and reducing its supply. But how does this work in practice?
Burning cryptocurrencies and NFTs is similar to burning cash or artwork, but the process is a bit more complicated than lighting a match.
But why would a crypto project want to destroy its own tokens? There are many reasons for this, and we will explore them.
What is token burning?
What does burning a token actually mean? Burning a digital asset involves sending tokens to a location from which they can never be recovered. These are also known as burn addresses, which effectively remove digital assets from circulation by locking them up forever.
A burning address is a digital wallet that cannot be accessed because it does not have a private key. Like a lock without a keyhole. Burning addresses are sometimes called "eater addresses".
Sending tokens to a burn address effectively removes the digital asset from the entire supply. That way, no one will have access to it, so no one can trade with it.
Burning tokens can also lead to an increase in the price of tokens that are still in circulation. The price of an asset can be understood as the relationship between supply and demand. If there is less of an asset available to investors than there is demand for it, the asset will become more valuable. See for example Bitcoin, of which there will be a total of 21 million available. On the other hand, if there is plenty of stock and enough to satisfy demand, the price of the asset often falls. An example is the Shiba Inu, which has an infinite amount of tokens, which can also be seen in its price.
By reducing the supply of tokens, burning tokens can create an imbalance with demand, which generally moves the price of the token upwards due to the increased scarcity of the asset.
Why is it necessary to burn tokens?
Occasionally, crypto projects burn their tokens in much the same way that companies buy back their shares, absorbing the cost of the shares. For this reason, projects burning tokens can even be interpreted as positive news, but they do not always have an immediate impact on prices.
This is because some token burns have been automated so that they happen regularly. But it also happens that they are released much earlier, so they are actually priced at the value that the token was trading at long before the burn. But it is also possible that other news related to digital assets has a greater influence on its price movement.
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