Cryptocurrency burning refers to the permanent removal of tokens from circulation. This is typically done by sending tokens to an address that no one has the private keys for, ensuring the tokens can never be accessed or used again. Proponents of burning argue that reducing the circulating supply can positively impact the price of a cryptocurrency in several ways.
What is cryptocurrency burning?
Cryptocurrency burning is the permanent removal of tokens from circulation. This is achieved by sending tokens to an address that no one controls the private keys for, often referred to as an eater address. Once tokens are sent to an eater address, they are unrecoverable and can no longer be used or traded on exchanges.
Burning reduces the total and circulating supply of a cryptocurrency. With fewer tokens available, the logic follows that the value of the remaining tokens will increase if demand stays constant or rises. This can incentivize holding tokens long-term for gains tied to supply reductions.
Some projects build burning directly into their tokenomics at launch, programming recurring burns into their smart contracts. Others rely on voluntary burning, where community members voluntarily send a portion of their tokens to an eater address.
How does burning impact price?
There are a few ways that cryptocurrency burning could potentially impact price:
- Reduced supply – With fewer tokens in circulation, remaining token become rarer assets if demand remains steady or increases.
- Increased scarcity – The permanently decreased circulating supply makes the cryptocurrency more scarce.
- Greater decentralization – Burning can distribute holdings more widely if large percentages of tokens are removed from a few addresses.
- Increased confidence – Burning mechanisms may increase confidence in the cryptocurrency’s long-term potential and rally holder support.
- Changed circulation rate – Aggressive burning decreases circulation over time, which may increase price if demand is unaffected.
In essence, burning manipulates token supply dynamics. With cryptographically proven scarcity and verifiable burning schemes, prices may rise as supplies constrict while demand increases or remains steady.
Evidence that burning increases price
While the logic behind burning seems sound, does data show definitive links between burning activity and price increases? Let’s look at some examples.
Binance Coin
One of the most commonly cited examples of the price impact of burning is Binance Coin. Binance burns BNB tokens quarterly based on trading volume on its exchange platform. From its whitepaper:
“Every quarter, we will use 20% of our profits to buy back BNB and destroy them, until we buy 50% of all the BNB (100MM) back.”
According to data compiled by Twitter user @Xcat7, when overlaying BNB quarterly burns against price:
- Q2 2018: 1 million BNB burned, price remained flat
- Q3 2018: 2 million BNB burned, 300% price increase over the quarter
- Q4 2018: 3 million BNB burned, 170% price increase over the quarter
- Q1 2019: 800K BNB burned, 320% price increase over the quarter
This relatively strong correlation seems to support the idea that burning BNB positively impacted price over 2018-2019. However, correlation does not necessarily mean causation. Other factors like increased utility of BNB, overall crypto market conditions, and aggressive Binance marketing likely also played a role.
FTX Token
FTX exchange also institutes recurring token burns. Per its documentation:
“On a monthly basis, FTX will destroy all fees generated on the platform over the past month, until there are 300 million FTT remaining.”
Aligning burning data with historical pricing reveals:
| Month | Tokens Burned | Price Change |
| June 2021 | 1.3 million | -53% |
| May 2021 | 1.7 million | -56% |
| April 2021 | 1.2 million | +53% |
| March 2021 | 800,000 | +76% |
Interestingly, during major market drawdowns in May-June 2021, aggressive FTT burning did not prevent steep price declines. During bullish months, however, burning activity may have contributed to sharper price spikes. Overall this data is inconclusive on the impact of FTT burns.
Criticisms and risks
Despite the theoretical logic, some criticisms exist around cryptocurrency burning:
- Manipulation risk – Savvy holders can strategically burn tokens to artificially pump prices and realize gains.
- Wealth concentration – Burning rewards existing holders but makes it more expensive for new users to buy-in.
- No guarantee of impact – Burning doesn’t necessarily directly influence prices as many other factors are at play.
- Deflationary spiral – Aggressive burning could reduce token usefulness and discourage use/adoption.
Additionally, some economists argue burning is wasteful compared to alternative uses of the tokens like funding development. Others contend reducing supply has no direct connection to value creation.
Does burning work better for meme coins?
Some hypothesize that burning has a stronger price impact on meme coins like Dogecoin and Shiba Inu. Why might this be true?
Meme coins lack intrinsic utility – their value is purely speculative, tied to scarcity and community hype. Removing meme tokens from circulation exacerbates scarcity and concentrates value in remaining supply.
Additionally, meme coin communities aggressively rally behind burning efforts, further driving speculation. fres, burning creates predictable supply shocks that feed rallies.
Evidence does show major meme coin burning events preceded price surges. For example, a widely-publicized Shiba Inu coin burn preceded SHIB’s meteoric rise in Fall 2021. Similar patterns emerged after Dogecoin burns earlier that year.
However, as with major crypto’s, causation is difficult to prove. Other factors like celebrity endorsement, community hype, and growing exchange listings also fueled meme coin breakouts.
Key takeaways
In summary, here are some key points on crypto burning:
- Burning permanantly removes tokens from circulation by sending them to an inaccessible address.
- Lower supplies can increase scarcity and theoretically drive value appreciation if demand remains steady or increases.
- Major crypto’s like BNB and FTT have burned tokens, with seemingly correlated price increases during bull markets.
- Burning may have a stronger impact on meme coins due to their pure scarcity/speculation value.
- Causation between burning and prices is difficult to conclusively prove due to other market variables.
- Burning is not without risks, like manipulation potential and discouraging adoption.
Conclusion
While far from conclusively proven, the logic behind cryptocurrency burning makes sense theoretically. Permanently decreasing supply should increase scarcity and value, all else being equal. The data does show some correlations between aggressive burning and crypto price increases, especially for meme coins.
However, direct causation is difficult to establish due to the many variables impacting crypto markets. Burning is just one part of the puzzle. At minimum, scheduled burns likely provide some degree of psychological support for holders betting on long-term supply squeeze gains.
Ultimately more research is needed to determine the true impact and effectiveness of cryptocurrency burning as a price support mechanism.
