Most cryptocurrencies have a limited supply of coins, by design.
For example, the maximum number of Bitcoins that can ever exist is 21 million.
Compare that to dollars. If the U.S. government needs more money it just prints more. There is no cap.
But the more dollars there are the less value each one holds. That’s called inflation, courtesy of the law of supply and demand.
In a moment we’ll look at cryptocurrency coin burningand how well it works, First though, let’s explore how cryptocurrencies are different from dollars.
Cryptocurrencies, unlike dollars, tend to be deflationary. Their values increase over time as demand exceeds supplies.
That’s an incentive for investors in newly minted brands of crypto coins.
But it also means that people will tend to save their crypto coins instead of spending them if they expect their value to continue increasing.
To incentivize people to spend their cryptocurrency, a little bit of inflation is desirable. If your crypto coins will be worth less tomorrow, you might as well spend them today.
Peercoin solved this problem by removing the hard limit on the total number of coins that are created over time.
Peercoin balances their cryptocurrency inflation and inherent value by adjusting the rewards up or down for mining new coins.
Other cryptocurrencies also allow inflationary prices, but use “coin burning” as their deflationary adjustment brake.
Cryptocurrency prices are also influenced by
1) how usable the currency is for buying stuff, 2) the number of competing cryptocurrencies,
3) the exchanges it can be traded on,
4) government regulations and 5) internal governance.
Coin burning is a way to decrease the circulating supply of a crypto coin, that helps to increase the value of the remaining coins, and potentially stabilize the price.
You can’t actually burn digital currency, but it can be sent to crypto wallets where no one has the key. They’re called “eater addresses.”
Some newer cryptocurrencies establish their value by requiring buyers to buy their coins with BitCoins. The BitCoins are then burned or removed from circulation.
Ripple charges a transaction fee on its network. The amount of the fee in Ripple coin is burned, decreasing Ripple supply and reinforcing the value of the remaining coins.
Does Coin Burning Really Increase Cryptocurrency Prices?
In practice, the natural volatility of cryptocurrency prices is usually much greater than price bumps from coin burning.
The number of coins burned at one time is small, so the effects are small.
Swings in cryptocurrency prices from other combined market forces tend to be large.
On the other hand, coin burning does not seem to harm the market and may help in the long term.
In the next video we’ll look at available options for reliable cryptocurrency news.
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Cryptocurrency