Cryptocurrency Coin Burns: Legitimate Practice or Fraud

In the world of crypto, the concept of "coin burns" has emerged as a curious and often controversial practice. A coin burn involves the intentional destruction or removal of a certain amount of a cryptocurrency's tokens from circulation. While some argue that coin burns serve legitimate purposes and contribute to the health of a crypto ecosystem, others raise concerns about their potential misuse and fraudulent implications. In this article, we delve into the intricate world of cryptocurrency coin burns, exploring their nature, notable examples, reasons for implementation, and the ethical considerations they raise.

What is Coin Burn?

A coin burn is the process of permanently removing a certain part of a cryptocurrency’s supply from circulation. This reduction in supply is typically achieved by sending the tokens to an "eater address" or a non-recoverable wallet. Once the tokens are sent to this address, they become inaccessible, effectively reducing the total circulating supply of the cryptocurrency.

Coin burns are implemented on blockchain platforms, ensuring transparency of the entire process. This practice has gained attention for its potential to influence the value of a cryptocurrency, its scarcity, and the overall supply-demand dynamics within its ecosystem.

Notable Cryptocurrencies Using Coin Burn

Two notable examples that have embraced coin burns are Shiba Inu (SHIB) and Binance Coin (BNB), the former on a more ad-hoc basis and the latter as a regular event.

Shiba Inu: The Burn That Started It All

Shiba Inu, a meme-inspired rival of Dogecoin (DOGE), initiated its journey with a significant coin burn event. One of its most notable coin burns was when the project's creators sent half of SHIB’s initial supply to Ethereum co-founder Vitalik Buterin's wallet. In an unexpected move, Buterin proceeded to burn 90% of the received tokens, essentially removing them from circulation. While this event remains the most publicized SHIB coin burn, the crypto’s project team has implemented several coin burns throughout the years.

Binance Coin: Regular Coin Burning Mechanism

Binance Coin (BNB) has established regular coin burning as part of its supply mechanism. Binance conducts quarterly coin burns, during which a predetermined number of BNB tokens are permanently removed from circulation. This practice is explicitly outlined in Binance's whitepaper and serves multiple purposes, including maintaining token scarcity and potentially influencing the token's value.

Why Cryptocurrencies Implement Coin Burns

Legitimate Reasons for Coin Burns

Legitimate coin burns are all about maintaining the crypto’s value by limiting its supply. Coin burns can help cryptocurrencies in the following ways:

1. Scarcity and Demand. Coin burns can create a sense of scarcity, potentially increasing demand and token value. By reducing the supply of tokens, coin burns may encourage holders to retain their assets and discourage excessive selling.

2. Project Sustainability. Coin burns can contribute to the long-term sustainability of a project by maintaining a healthy token economy. Removing excess tokens from circulation can prevent inflation and ensure a controlled growth trajectory.

Sinister Purposes Behind Coin Burns

Many crypto analysts rightfully point out that coin burns aren’t a necessary mechanism for a crypto project. Most cryptocurrencies, whether they are “deflationary” (i.e., with a pre-determined maximum supply) or otherwise, don’t use burns. Therefore, there is often an aura of suspicion around cryptos that actively indulge in coin burns.

Critics of coin burns point out that they might be used for such sinister purposes as:

1. Concealing Ownership Proportions. Some projects may conduct coin burns to obscure the proportion of the total coin supply allocated to project owners and insiders. At the beginning of the project, owners might be allocated relatively small proportions of the total supply. These modest proportions are then actively promoted during the project launch and an Initial Coin Offering (ICO). Later on, coin burn events reduce the total supply, while the amounts allocated to the owners remain untouched. As a result, the owners end up owning a higher proportion of the new (reduced) supply.

2. Market Manipulation. Coin burns can be misused to manipulate token prices. Unscrupulous projects might artificially inflate the value of their tokens through burns, luring investors into a false sense of security. A worthless crypto might experience a short period of price surges simply due to large-scale coin burns.

3. Attention Diversion. Certain projects might use coin burns as a distraction from underlying issues or controversies within the ecosystem. This could divert attention away from problems that need genuine solutions. In such scenarios, the coin burn event is widely promoted as some sort of “genius move” on the part of the project management. The event is being trumpeted, while some serious underlying problems are being swept under the rug.

Coin burns are a double-edged sword. They have the potential to serve as a mechanism for improving token economies, reinforcing commitment to community, and bolstering project sustainability. However, they can also be exploited for fraudulent purposes, perpetuating an air of deception and manipulation.

For potential investors, the history of a cryptocurrency's coin burns is a vital piece of information. If the crypto you consider investing in has a history of coin burns, either ad-hoc or regular, carefully research the motivations behind and outcomes of these events.