What Is Coin Burn & Risks Associated With It? A Guide For Investors!

A cryptocurrency is a virtual currency that is created and managed through the advanced encryption technique known as blockchain technology. The decentralized nature of cryptocurrencies makes them free from government manipulation and interference.

What Is Coin Burn In Cryptocurrency?

This characteristic makes it entirely different from fiat currency. Now, another part of this digital asset seems to be the trendiest, that is the coin burn. What is the coin burn? How does it affect you? Read this article till the end to get answered.

Coin burning is a technique by which cryptocurrencies keep their market value high and attempt to offset inflation. Coin burning is the process of permanently removing the circulation of coins from the market, thus reducing the total supply. When a large portion of the coin is removed from the market, that coin experiences high demand and the price goes up.

An Overview On Coin Burning

Technically, coin burn means, sending the coins of native cryptocurrencies to a public address from which those particular coins can never be retrieved, that is to private keys that are never obtainable. Below given are the steps in the order in which coin burn occurs.

By stating that the coin holders want to burn some nominated amount of coins, they will call the burn function.
The contract will then verify whether the coin holder has the nominated amount of coins in his wallet.
If the coin holder doesn’t have enough amount of coins, then the statement becomes invalid and the burn function doesn’t execute.
If they have enough amount of coins in their wallet, then the function executes and the nominated amount is subtracted from the total amount in the wallet.

The important thing to remember before burning coins is that, you cannot retrieve the coins after executing the burn function. The coin burn is done for:

Making new coins
Rewarding the coin holders
Destroying unsold coins

Burn Function

The burn function is a function available for anyone at any time in the BNB contract. By calling this function, an account holder can permanently remove the nominated amount of coins from their wallets and all coin burns are recorded as a transaction in the blockchain.

Coin Burning The Circulating Supply

Many crypto holders burn the coins that are circulating. They eliminate the tokens that are being traded or held by investors. That is, the organizations that issue the cryptocurrency must have to buy it back from coin holders. The main advantage of this type of coin burning is that the size of the burn is largely determined by market forces and price actions.

Burning The Non-circulating Supply

Sometimes coin holders burn the non-circulating coins. As these coins are not circulating in the market, this type of burning doesn’t have a large effect on prices.

Burning During Each Transaction

Sometimes coin holders burn coins during each transaction. It’s done to make the coordination much easier. It also helps to reduce confusion and misunderstandings among investors.

Price Targeted Burnings

Some coin burns are done to attain a certain targeted price value for the coins. But the full process is very complex because cryptocurrencies cannot achieve targeted prices like stablecoins. Even stable coins experience fluctuations in the market.

There are massive risks associated with coin burning. The coins are burned to get value for the coins that exist in the market. The main risk behind coin burning is that it’s not sure that the rest of the coin will gain value after coin burning.

We hope that you all found this article useful for understanding the basics of coin burning. Please let us know your comments and queries through the comment section given below and we will try our best to reach out to you.