Coin burning is a process where cryptocurrency miners and developers remove a specific portion of coins from circulation to control their price. It is a common industry practice to incentivise long-term holding among users, by managing the price through restricting supply.
This is generally done periodically.
Why is it done?
According to Sathvik Vishwanath, Co-Founder and CEO at Unocoin, coin burning
is done either because the project might have got back the tokens from their customers for the services they are giving or the company decided to discard some of the tokens for increasing the value of others in the market.
Vincent Lau, Managing Director of International Operations at Huobi Global, further tells that reducing the token supply helps support the price of the token in the market and can increase its value over time.
Another aim of these burns is to keep inflation low.
So, what impact does it have on investors?
As per Vishwanath, it is a good event for the investors as it reduces the total number of tokens available for circulation.
“It is important for the investors to know that this event is happening, then when it is happening and what is the burn that is happening so that the price variation due to the event gets factored in,” he stresses.
In a way, we can compare this to the reduction of equity in a corporation that was never issued or was bought back from the investors.
“When it comes to utility-based tokens where a business or project has issued the tokens in advance based on the promise of delivery of the services in the future, this is more comparable to a milk vendor who just destroyed the tokens (that was distributed by him at the start of the month to his customers) that he gets back on day to day basis,” Vishwanath explains.
No matter what the reason behind the burn is, Vishwanath adds that generally the community accepts this as a good sign and now that the number of tokens available for trading has reduced, the price generally tends to increase in time.
For more information, check out our infographic which explains the entire process in detail:
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