The concept of burn tokens It is, for many, a novelty. However, it is a strategy that has been practiced for several years. They are the self-destructing cryptocurrencies: a process by which a certain amount of cryptocurrency is intentionally destroyed to reduce its circulating quantity in the market.
Is there such a thing as token burning in the stock market? Yes, it happens when companies decide to buy back their shares to minimize their circulation, reducing supply and stimulating demand. But a token burn is different: it simply removes a certain amount of crypto from the market.
When the value of a cryptocurrency drops, it is decided to burn tokens to generate a certain scarcity. And what advantages does this bring? becomes scarce, its value increases. Furthermore, the existing value of cryptocurrencies is no longer dispersed and is concentrated in a few. That is, The remaining tokens increase their value.
Why do burn tokens exist?
The main reason is the enormous cryptocurrency price volatilityAt any given time, the value of these digital currencies can rise or fall. This also stems from the need for issuers to control the value of cryptocurrencies.
Si There are many tokens on the market, their value is declining.Imagine a taxi line with many vehicles. If there are too many taxis, there are losses, and people aren't willing to pay much for each ride, since there are plenty of taxis.
What happens if you reduce the number of taxis? A line of people forms waiting for a taxi to become available. Furthermore, the price of the service increases, as there is less supply, making people willing to pay more to the few available taxi drivers. The same thing happens with cryptocurrencies!
If a excess of cryptos circulating, its value depreciatesHowever, if their quantity is less than the demand, they increase their value. This is why many platforms tend to burn their tokens: this way they manage to control the deflationary effect.
How are burn tokens performed?
They are not burned with a match, nor are they “erased.” When it is said that tokens are “burned,” they are actually They send to a wallet address that only receives coins, but never releases them.. This is how the tokens become trapped, held forever.
For about three years now, the The process of burning cryptocurrencies is done in a scheduled mannerSome exchanges remove a percentage of their tokens every so often. They also schedule this burn so that the “burn” function is activated every time the currencies exceed a depreciation marginThis is usually done with USDT-denominated coins, which are pegged to fiat currencies or assets. In these cases, the tokens are burned so that the relationship between the cryptocurrency and the real asset is always be 1:1As we can see, there is an obvious reason for burning tokens.
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Advantages of Token Burning
In general, it's a practice that is done with caution. Cryptocurrencies cannot be burned on a whim either! Furthermore, a company cannot burn tokens that are already in the hands of individuals, but only those that are in possession. Likewise, there can never be more digital currencies in circulation than the cryptocurrency issuer owns.
When the token burning is done, the issuer must ensure that it controls the majority of cryptocurrenciesYou can only burn a certain amount of the currency you own. This calculation assumes that those who hold the currency will see its value increase and may try to sell it.
By burning tokens, you avoid the excess liquidity. As well, Each circulating coin increases its valuationAnother advantage is that the burning of tokens is controlled by always monitoring how the cryptocurrency's price evolves in the market. Another fact is that the best coins to be burned are those that are tied to real assets, since the ideal percentage margin of coins to be eliminated is known.
Token burning is the simplest way to monitor the value of a digital currency. No market campaigns are required, nor is it necessary to manipulate the prices of the physical assets that these currencies sometimes control. Therefore, it is an increasingly common practice, demonstrating that the cryptocurrency ecosystem has more operational and control strategies.
