when cryptocurrency is sent to an irretrievable wallet, the commodity becomes scarce, and its worth increases.
the most effective way to hike the price of a commodity is to introduce scarcity. cryptocurrency players use a similar technique to ‘burn’ crypto on a regular basis. called crypto burning, this involves exchanges and miners removing a fixed number of coins from circulation.
in January 2022, crypto exchange Binance initiated its first-ever ‘auto burn’ where it destroyed over 1.6 million Binance tokens worth $750 million. a preset formula was used to arrive at the number of tokens to be burned based on the number of blocks produced on the Binance Smart Chain.
during crypto burns, the coins are sent to an unusable wallet, which essentially takes them out of the market. once sent to the burn address, the coins are lost forever.
discarding tokens can help increase their value over time. this is similar to a share buyback by corporates that is done to return the value of the stocks to the shareholders.
it is a signal to the market that the number of tokens is about to reduce and hence existing investors are at an advantage. typically, the ‘burn’ is announced roughly four to six weeks ahead of the actual event, so that existing and prospective investors can take note of the possible price fluctuations.
however, it is important to note that the prices may not increase overnight. while ‘burn’ strategies are adopted to cause a temporary scarcity, it is the investor sentiment that drives prices upwards or downwards. it bodes well to remember that there could be unscrupulous and unverified operators who may claim to ‘burn’ cryptos and simply hide them somewhere else.
for new investors, it is important to do price-history research and not rely on ‘burn’ events to make purchases. while there could be price benefits in the long term depending on the number and type of tokens ‘burnt’, destruction alone is not a foolproof method for growing your wealth.