What Does It Mean to Burn Crypto? Benefits & Drawbacks

Burning crypto removes coins from circulation, effectively destroying them. Many crypto projects and even individual holders use the process to increase the price of the coin or to keep its value high.

But what does it mean to burn crypto? How does this process work? Is it necessary for every crypto project? There are so many questions, and this guide aims to answer all of them so you can fully understand the process of burning crypto.

Understanding crypto burning

To burn crypto, you send a specific number of coins to an address from which they cannot be retrieved. Any address can be a burn address as long as it’s inaccessible. These addresses are often called burner, null, or eater addresses.

Burning coins can be done with any cryptocurrency, and the process is sometimes even systematic. In other words, the company behind the crypto project burns coins, typically to keep the crypto’s value high. Individual holders can also burn coins if they want to for various reasons.

When coins are burned, they are removed from the circulating supply. This lowered supply is precisely what tends to keep a coin’s price high or even increase it, but this is not always a certainty.

Many crypto projects have specific addresses for burning tokens. These null addresses (they consist of only zeros, hence the name) are specifically created only to receive crypto, meaning once the coins are sent to a null address, they are lost forever.

How does the coin burning mechanism work

Coin burning can be done manually or automatically. When it’s done manually, the token holder burns the coins by sending them to an unusable address. The process of automatic burning is much more trustworthy because it involves the use of smart contracts.

Burning with the help of smart contracts is relatively simple. The holder initiates it by calling the burn function and designating the number of coins to be burned.

The token’s smart contract checks whether the address has enough tokens for the process. If it does, the burn function is executed, and the provided number of tokens is deducted from the user’s address and sent to a null address with no keys, meaning it cannot be accessed. Once the process is over, the tokens are lost forever.

Bear in mind that the smart contract needs to have a burn function coded into it, or it will be useless for this process, and you’d still have to do the whole thing manually.

Fun fact: One of the most famous token burns in the history of crypto is likely the one performed by Vitalik Buterin, the founder of Ethereum. The Shiba Inu project sent him 50% of the total supply soon after the launch in August 2020.

However, Buterin decided to burn 410 trillion SHIB tokens in May 2021, which amounted to around $6.7 billion at the time. This was 90% of the tokens the Shiba Inu creator, Ryoshi, sent him. In his usual philanthropic fashion, Buterin sent the remaining 10% to charity.

Benefits of token burning

Burning crypto can be of great benefit to all token holders. Let’s take a look at what these advantages are.

1. Price control

One of the main benefits of coin burning is price control. As mentioned, there’s a direct correlation between price control and a lowered supply of coins. Many crypto projects have systematized burning precisely because of that.

Stablecoin projects are among the most notable examples of systemic coin burning practices. The burning mechanism is instrumental in maintaining a steady value of the coin despite market movements.

2. Spam protection

Projects that burn tokens also do it to protect the network from Distributed Denial-of-Service (DDoS) attacks. Token burning makes the project a less viable option for DDoS attacks because it reduces the crypto network’s allowed number of transactions. Other malicious activities are also discouraged by protecting the integrity of the network.

3. Blockchain validation

Some cryptocurrencies use a consensus mechanism called Proof-of-Burn (PoB), where holders are required to burn a portion of their assets in order to create a new blockchain block and prove their dedication to the network. Naturally, burning also leads to increased rewards, so holders are incentivized to continue the practice.

4. Increasing holders’ confidence in the project

Coin burning is a positive practice in the crypto sector, which typically means that using the mechanism can significantly improve confidence in the whole project. Burning is a measure intended to combat deflation, which is why there’s always the potential that holders and new interested parties will want to buy and keep the coins for the long term.

Drawbacks of burning tokens

Coin burning is not without its flaws, so let’s cover them, as well.

1. Burning small quantities has little impact

Burning a small number of coins rarely impacts the integrity of the network and the coin’s price. For instance, if a couple of hundred tokens are burned where the circulating supply is higher than 100 million, there’s little chance that the action will impact the network.

2. Coins are permanently removed from circulation

The fact that burning coins means permanently deleting them from circulation can in itself be a drawback, especially for individual holders. For instance, imagine a situation where you’ve burned a certain amount only to realize that the price has surged significantly a couple of days later. This is by no means an uncommon situation.

Burning tokens also effectively reduces liquidity, which makes it harder to trade that cryptocurrency without slippage.

How does burning crypto impact the price of a coin

Now that we’ve answered the question of “What does it mean to burn crypto?”, let’s tackle the issue of how burning tokens influences the price of the remaining tokens.

It’s actually quite simple and based on the notion of supply and demand in economics. The belief is that by removing a certain portion of coins from circulation, the resulting lowered supply will lead to more demand.

Naturally, as is the case with corporate stock buy-backs, the process can either benefit the network or damage it. The demand can become higher or lower, and the price can rise or fall accordingly.

The very process of token burning is considered to be a good thing in the world of crypto. However, the price change doesn’t necessarily have to be positive, and there’s nothing that will guarantee a rise in the value of a cryptocurrency. The variation in the price depends on many factors, like current crypto market sentiment and crypto project development.

That being said, here are a couple of notable examples of crypto projects burning coins and the effects of the process on the prices:

Shiba Inu (SHIB) — Shiba Inu has a burn mechanism designed to gradually reduce the token supply. The process often leads to a price increase, especially when the burn rates rise dramatically, as they did in the middle of September 2024, soaring by 8,000%.
Binance Coin (BNB) — Binance regularly conducts token burn events, where the company removes millions of BNB tokens from the circulating supply to keep the value high. For example, the 27th burn, completed on April 24, 2024, burned a total of 1,944,452.51 BNB (worth around $1.18 billion). The price increased by 0.41% on the same day and then by 0.77% the day after.

Conclusion

Burning coins is effectively the same as the physical burning of paper money, hence the name. However, the digital practice of coin burning is a positive thing, as it leads to price control, reduced deflation, network integrity, and much more.

There are some drawbacks, but the practice is still necessary for most projects that use it systematically, and it has proven to be beneficial for those networks many times over.

FAQs

Will I lose my crypto if I burn them?

Yes, you will. More than that, you’ll lose these coins permanently because burning coins means that they go to an address no one can access. When they are sent there, the private keys of the coins become stored in that address, making it impossible to have ownership of those assets.

What is an example of token burning?

A good example is one of Binance’s quarterly burns. For instance, Binance announced in late July 2024 that it had completed its 28th quarterly burn by BNB Chain. The company destroyed 1,643,698.8 BNB, which were valued at $971 million at the time.

Which crypto burns the most coins?

The biggest crypto exchange on the planet that constantly introduces new listings, Binance, burns the most coins, and it does it systematically. Every quarter, the exchange reduces the supply of Binance Coin (BNB) by burning a specific number of BNB to maintain a stable and sufficiently high coin value.

Does the token price increase after a burn?

Since coin burning removes coins from circulation, the supply of that crypto is reduced. As is usually the case when the supply of a certain asset is lowered, its price rises. Naturally, this isn’t guaranteed, and there are plenty of examples when burning crypto didn’t increase the value.

What happens when coins are burned?

When tokens are burned, they go to a burn address and are effectively removed from circulation, meaning they are no longer available and cannot be accessed or used again.

How many Bitcoins have been burned?

There’s no exact number, but according to a 2020 Chainalysis report, around 3.7 million of the then-mined 18.6 million BTC haven’t been moved in five or more years from their addresses. It’s safe to assume that most of them are burned. In other words, around 17% of BTC that will ever exist (21 million) is likely lost forever, and the percentage can still increase in the future.