Heads Up: The Fed continues to raise rates — up 3% this year — making credit card debt even costlier.
Pay it off today with a low fixed-rate personal loan. View your rate —>

What Does Burning Crypto Mean?

By Brian Nibley · August 10, 2022 · 9 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Does Burning Crypto Mean?

When a cryptocurrency community decides that they want or need to destroy units of a specific cryptocurrency, they use a process called coin burning. Burning crypto is the process that effectively takes those tokens out of circulation, reducing the total supply of that coin and in some cases increasing demand.

A crypto coin burn is similar to a stock buyback. That’s when the company that issued the stock buys back a number of shares and reduces the total number of shares on the market.

While a coin burn can bump up the value of a certain cryptocurrency, there are no guarantees that this process will increase the price, or (if it does) that the price won’t then decline. In fact there are several other reasons developers might choose to burn coins.

What Is Crypto Burning?

So, what does burning crypto mean exactly, given that all “coins” are digital and exist via blockchain technology?

First, think about how crypto gets bought and sold. Traders can exchange crypto by sending it to and from a crypto wallet, using their private keys. To execute a coin burn, users send their crypto to an “eater address,” or a burn wallet, which is a crypto wallet that only receives tokens, but can’t send them. Thus those coins are effectively locked up, and taken out of circulation.

That transaction, confirmed on the blockchain ledger, makes the coin burn permanent and irrevocable.

6 Reasons for Burning Crypto

There are a few reasons why different cryptocurrencies might want to burn coins. Some projects include this process from the beginning, as part of the protocol itself, while others choose to take it on in some form later down the line.

With the rise of decentralized finance (DeFi) protocols, coin burning has become more common. Here are some cases when coin burning makes sense.

1. As a Consensus Mechanism

Some coins use proof-of-burn (PoB) as a consensus mechanism on the network. This requires both miners and users to burn some of their coins on a regular basis. Proponents of this method consider it an efficient way of verifying transactions because it does not use any real-world resources.

There are several specific methods of using this consensus mechanism, such as:

•   In a PoB network, miners have to burn some of their coins to mine new blocks. It sounds counter-intuitive, but miners then receive rewards in the form of new coins, when they verify a new block of transactions.

•   Some coins require the burning of a different cryptocurrency in exchange for new tokens on the new network. Miners might have to burn Bitcoin, for example, to earn another coin.

•   Some blockchains use more complex forms of PoB, such as burning native tokens in exchange for credits. Holders can then use those credits to perform a function on the blockchain. Sometimes this involves constant minting of new coins and burning of a portion of the coins.

2. To Protect Against Spam

Coin burning can help protect a network from Distributed Denial-of-Service Attacks (DDoS), and stop spam transactions from slowing down the network. Here’s how: Just as Bitcoin users pay a small fee for sending transactions, or Ethereum users pay a gas fee for smart contract computations, some networks require that miners/validators burn the fees they get for transactions.

This mechanism can automatically burn a part of each transaction that gets sent. Ripple (XRP), for example, uses this method.

3. To Increase a Coin’s Value

The basic economic law of supply and demand dictates that if the supply of something decreases, then the price will have to rise, assuming demand remains constant. This is part of the reason that Satoshi Nakamoto (the pseudonym used by the person or people who created Bitcoin) programmed the Bitcoin protocol to “halve” every four years, which reduces the block reward for miners by 50%. Thus, fewer bitcoins enter circulation.

The destruction of coins can serve a similar purpose. Burning coins reduces the supply.

While fiat currencies are inflationary in nature and central banks can print them in unlimited amounts, some cryptocurrencies are deflationary in nature and have fixed supply limits. Bitcoin has a supply limit of 21 million coins.

The more people who want to buy, hold, or use Bitcoin, the faster the price will tend to rise because there are only so many coins to go around. As long as the demand stays constant and the supply remains limited, the price of Bitcoin may keep rising compared to any fiat currency. Past performance, of course, being no guarantee of future results.

For other cryptocurrencies, engaging in coin burning can sometimes be an effort to manage supply in a way that increases scarcity and tries to mimic Bitcoin’s supply and demand dynamics.

4. To Keep Stablecoins Stable

Coin burns can be necessary in the case of stablecoins, because burning a certain portion of the supply can help the stablecoin stay pegged to its fiat currency (like the dollar).

For example, if demand for a stablecoin rises and the price goes above its dollar peg, the protocol’s smart contract will automatically issue new tokens to bring the price down — or burn coins to drive the price up so its dollar peg remains constant.

5. As a Sign of Long-Term Commitment

The owners of a crypto project sometimes burn coins on their network as a show of commitment toward scarcity. Maintaining a certain degree of scarcity (see Bitcoin, with its 21 million cap) makes everyone holding those coins a little richer. Owners may accomplish this through a burn mechanism, providing periodic burn schedules, or as a one-off event.

Some investors view this strategy as a way to keep a coin’s value growing, and thus it may help investors feel more confident about staying invested over the long term.

6. To Promote Mining Balance

In some cases, the PoB system can establish the burning of crypto on a regular cadence that helps maintain a balance between new users and early arrivals — e.g. the first and sometimes the biggest investors on that platform.

That’s because the PoB consensus mechanism, which requires burning coins to validate transactions, helps to stimulate the mining of new coins. So this permits a balance between the new users and the old guard.

Up to $100 in bitcoin2 – just for you.

With 30 coins available, our app offers a secure way to trade crypto 24/7.


Pros and Cons of Burning Crypto

Obviously, crypto burning has some upsides for the platform and for certain users, but as more projects embark on coin burnings, it pays to keep the downside in mind as well.

Pros of Burning Crypto

•   Coin burning may enhance a crypto’s value by limiting the supply. An uptick in price isn’t guaranteed from a coin burn, but it has happened — although a drop can also follow.

•   Burning coins can help control inflation for a particular crypto, e.g. stablecoins.

•   Using proof-of-burn as a consensus mechanism is a low-energy way to validate transactions and create new coins, while keeping the supply in balance.

•   Related to the above, proof-of-burn can help protect the network from being hacked.

Cons of Burning Crypto

•   A coin burning may have little or no impact on long-term price.

•   Sometimes a coin burning can be faked, and developers use the “burn” to send coins to their own address.

•   Rather than decreasing supply and increasing demand, sometimes burning coins can turn investors off if they feel manipulated or lose confidence in the project.

Pros

Cons

May increase demand for a coin, and the price may increase. The burn may have little or no impact on the price.
Can help curb inflation for a particular crypto. A coin burn can be faked.
PoB is a low-energy consensus mechanism. Investors may lose confidence in the crypto after one or more coin burnings.
May prevent fraud in the network.

Different Types of Coin Burning

Coin burning typically falls into one of three categories:

1. Coin Burning at the Protocol Level

The proof-of-burn consensus algorithm discussed earlier falls into the first category. Blockchains that use PoB have coin burning built into their protocols. This means burning is an intrinsic part of the network and takes place consistently so long as the coin continues to function.

Using coin burning as a spam-protection mechanism can also occur at the protocol level. As mentioned earlier, transactions must have a cost to prevent the network from being spammed with fake transactions. One way to accomplish this is to automatically burn a portion of each transaction fee.

2. Coin Burning as Economic Policy

The second category involves developers who might decide to burn coins in order to control the supply of coins in order to manage inflation.

One example might be the deliberate destruction of unsold ICO tokens. The creators of a new project might have created X number of coins hoping to sell them all, but failed to meet this objective. In such a scenario, the developers could choose to burn the excess coins to maintain a specific level of supply.

3. Coin Burning in Lieu of Dividends

Some projects might also use coin burning as a sort of dividend payment to coin holders. If the owners of a token have a business that generates cash flows, like a crypto exchange for example, token holders could receive rewards through coin burning.

In a boon to those who’ve chosen a HODL strategy, the owners could buy back tokens from holders and burn those coins, thereby increasing the value of everyone’s crypto. This might occur in lieu of traditional dividends which might trigger securities regulations. The burn process could occur as a one-time event or a regularly scheduled one.

History of Crypto Burns

As noted above, it’s likely that the process of burning coins to limit the supply and increase demand comes from the long-standing Wall Street tradition of stock buybacks to improve share price and reward shareholders. In the case of crypto coin burns, though, the reasons can be more complex.

Different Reasons for Burning Crypto

These days there’s nothing unusual about a coin burn. And there have been several well-known coin burns, generally starting in 2017. Some of them were at the protocol level (meaning, the burn or burns were built into the project itself), and some burns were executed in order to limit supply and raise cash — or in lieu of dividends (as noted above).

•   In 2017, for example, Binance Coin (BNB) began its series of quarterly burns. BNB launched with 200,000,000 total supply, and will continue on its burn schedule until 100,000,000 coins are burned — or 50% of all BNB in circulation. BNB’s 20th burn occurred on July 13, 2022.

•   By contrast, Bitcoin Cash (BCH) had a coin burn in 2018 that drove up the price temporarily. And Stellar (XLM) held a one-time burn of 50% of its supply in November of 2019. This was with the express intent of limiting the number of coins and increasing demand.

•   More recently, Ethereum made headlines when the platform burned more than 2 million of its Ether tokens in March 2022: The burn was worth nearly $5.8 billion. This burn was automated, however, as part of an earlier fork of the Ethereum blockchain that laid the stage for this coin burn: EIP-1559.

The Increase in Coin Burning

While some view burnings with a skeptical eye, there’s no arguing that this strategy has become more popular — particularly for new crypto that launch with a big supply.

One tactic investors will note is that a new crypto might launch with upwards of a billion or even a trillion coins, typically worth a fraction of a penny, with the intention of later burning some of that excess supply in order to drive up prices.

Shiba Inu Coin Burn

The case of Shiba Inu’s burn strategy, or burn controversy, is a good example of how some platforms try to manage a vast circulating supply, a very low price, and investors eager for profit.

Shiba Inu (SHIB) is worth $0.000019 as of August 3, 2022, with a total supply of about 549 trillion SHIB. The coin burn conducted at the end of July 2022 only burned about $13,500 worth of SHIB, or 0.0002% of its supply.

While SHIB has a loyal cadre of investors, some question the merits of the SHIB coin burning.

Cryptocurrency Investing Today

Burning coins involves taking them out of circulation and destroying them forever, permanently reducing the available supply of that token. The exact reasons for doing this can vary, from platforms that essentially program coin burns into their protocol, to crypto developers that simply want to see a price bump.

Although the crypto community generally views coin burns as more positive than negative, there is still a great deal of skepticism about coin burns. Different types of cryptocurrency use coin burning in different ways, and it’s important to understand the approach of any crypto in which you’re considering investing.

The SoFi Invest® platform makes it easy to buy and sell crypto when you set up an Active Invest account through the SoFi Invest app. SoFi doesn’t offer crypto wallets or staking, but you can trade dozens of different crypto, 24/7, from the security and convenience of your phone or laptop.

FAQ

What are crypto burns?

Crypto burns, also known as coin burnings, are when a project decides to take a certain number of coins out of circulation.

Why do crypto burns take place?

There are several reasons. Two common ones: The coin burn is part of the platform’s overall protocol and is predetermined. In another case, developers burn coins to limit supply and potentially increase demand. It’s a good idea to look into why a coin burn is happening to understand the impact on the crypto overall.

Can burning crypto increase its value?

Burning crypto might increase its value, but it’s not guaranteed that it will. One thing that’s clear from looking at the performance of different coins after a burn: even if the price bumps up, there’s no guarantee it will stay there.


Photo credit: iStock/Aliaksandr Bahdanovich

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
SOIN0722023

2 Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2022. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender