Token burning has become a common strategy among altcoins to increase their value, but many coin owners do not realize the dangers associated with such manipulations. In this article, we explore what token burning is, its risks, and why Bitcoin does not use this strategy.
What is Token Burning?
Token burning is the purposeful destruction of a part of the coin issue. It is achieved by sending them to addresses that are not accessible or using smart contracts. The motivation behind token burning varies, but it is typically seen as a technology that helps restore the price of a digital asset to a target level or distribute profits among team members.
The Risks of Token Burning
The risks associated with token burning are often invisible to coin owners. While management burns their own coins, other users’ coins seem to benefit from this, as their market value should increase. However, targeted and large-scale token burning indicates a significant centralization of such projects, and it becomes obvious that the issuing center and people close to it are trying to artificially achieve certain goals.
Token burning also creates risks of so-called “pump and dump” schemes. Initially, the rate of a certain coin rises due to limited supply, which can attract new traders and investors. But when the price reaches the target level, large coin holders and pump and dump organizers quickly and massively sell off their reserves. This leads to a significant drop in the asset’s price, which negatively affects all other holders.
Why Bitcoin Does Not Use Token Burning
Bitcoin is built on the principles of decentralization and a predefined algorithm for changing the supply of coins. The subsidy miners receive for mining a block is reduced every four years, thus contributing to a decrease in the growth of the supply of coins. After 2140, all coins will be mined, and bitcoin issuance will stop completely. Bitcoin does not have any centralized authority that controls the issuance, and the supply of BTC is limited both in terms of the total limit of 21 million coins and in terms of the timeframe for their release. These rules cannot be arbitrarily changed by any participant.
The absence of token burning is a necessary prerequisite for creating new universal money and ensuring hyperbitcoinization in the future. Satoshi Nakamoto said about the loss of access to bitcoins due to unwise storage of private keys, “Lost coins only make the coins of others a little more expensive. Think of it as a donation for others.”
Token burning is a form of manipulating the supply of coins that does not create any prerequisites for strengthening the position of the relevant projects. Only Bitcoin, with its predefined algorithm for issuing coins and controlling inflation, offers an effective alternative in this regard. The absence of token burning is a necessary prerequisite for creating new universal money and ensuring hyperbitcoinization in the future.