Last year, the cryptocurrency market simply could not stop. In just 12 months, the added value of all virtual currencies soared by just over 600 billion dollars , which represents more than 3,300% on a percentage basis. It was a remarkable year in every sense of the word.
As the virtual currency market has exploded and has become the center of attention, we have also witnessed a cycle of trends that are observed in the forefront. In the second half of 2017, everything that was not called bitcoin was fashionable, as investors focused their efforts on the search for the next bitcoin.
Not long after, the privacy coins (privacy coins) became the next novelty in the cryptocurrency market. Privacy currencies, such as Monero , Dash and Verge , take the perceived anonymity of cryptocurrency transactions and reinforce it to completely hide the identity of the sender and receiver of the funds, as well as the amount sent.
Now a new trend has emerged in the space of cryptocurrencies and it is the Coin Burn , or burning of coins.
The Coin Burn is the latest trend of cryptocurrencies
Although the name might sound something like an investor with gasoline and matches is looking for a way to have fun, there is no real fire involved in the matter, since virtual tokens only exist in digital form.
What coin burning really refers to is the process by which cryptocurrency miners (people with powerful computers who validate cryptocurrency transactions and operate based on the working test model) or developers send tokens to a specific address that has private passwords, which are inaccessible. In simpler terms, it is a means of eliminating tokens from the outstanding supply , either to reduce the inflation rate of the currencies, or to reduce the supply of coins in circulation.
If this sounds familiar to you, it is because it is similar to the concept of a publicly traded company initiating a program to repurchase ordinary shares . If a listed company uses its available money to repurchase common shares, it must reduce the total number of shares outstanding. By doing so, it makes every remaining stock scarcer than before, potentially increasing its value . In addition (at least for listed companies), you can improve earnings per share, since there are fewer shares outstanding in which you can divide net income.
Something similar happens with the burning of coins. When withdrawing coins from the circulating supply, the perception is that each remaining virtual token is scarcer than before. This should serve to increase its value , rewarding shareholders with important and long-term holdings.
Two cryptocurrencies that have recently adopted the burning of coins
In recent days, Bitcoin Cash has joined this trend, with the virtual currency that branched out from bitcoin last summer, earning 94% in the week leading up to April 23, 2018. Most people are wondering what Bitcoin Cash is in, the answer seems to be nothing more than the burning of coins.
According to an announcement published on April 20 on Twitter by Antpool , a mining company that currently validates just over 8% of Bitcoin Cash transactions, it has been sending 12% of the coins it receives as a reward for the validation of the transaction, to these inaccessible addresses mentioned above, where they can no longer be used. Since mining creates new currencies, Antpool shares are working to reduce the annual inflation rate of the Bitcoin Cash BCH token . This deceleration of inflation seems to have a positive impact on the price of the BCH token.
But even before Bitcoin Cash made headlines about a large mining company burning coins, Binance Coin and its BNB token , they were embracing the idea of burning coins. If this name sounds to you, it's because Binance Coin is the official currency of Binance. Binance encourages users to use their BNB currency to pay the fees per transaction, with staggered discounts on trading rates during the first two years.
In mid-January, Binance ended up burning 1,821,586 BNB coins , and did so again in mid-April, burning 30 million dollars in additional coins. Although Binance Coin has not had nearly the same response as Bitcoin Cash had after Antpool's revelation, burning some of its rewards for mining blocks, Binance Coin has been among the highest performing virtual currencies since the year began.
The burning of coins has a risk
On the one hand, some investors may see the burning of currencies as a sign that cryptocurrency developers are finally beginning to seek the welfare of investors in their tokens. But to assume that burning coins is a guaranteed positive measure could end up being an error.
The biggest problem with burning coins is to assume that you will always reduce the number of pending tokens, and that this means intrinsically that a virtual currency should go higher. The fact is that the circulating supply of digital tokens tends to be very fluid , and often difficult to discern.
You can take bitcoin as a perfect example. Some would say that the shortage of bitcoin is what makes it valuable. The bitcoin number is limited to 21 million tokens, which provides the perception of scarcity. However, bitcoin has created new tokens repeatedly through hard forks (hard forks) of criptomonedas, ie divisions in a cryptocurrency caused by a disagreement between developers, as the way forward in the future for updates of the network. This is how Bitcoin Cash , Bitcoin Gold and Bitcoin PrivateThey were created. There is nothing that prevents Bitcoin or other virtual currencies from bifurcating in the future, which provides a false sense of scarcity.
If there were any way to guarantee the scarcity of a virtual currency, that would make the coin burning mechanism an enigmatic value generator for the token holders. But without this guarantee, it can prove to be much less effective in creating value and increasing the prices of tokens, than that generated by most cryptocurrency investors.
