In order for a cryptocurrency to maintain its value, it is important that it maintains a deflationary status. This implies that the supply of a certain cryptocurrency should always be less than the demand generated by investors buying Bitcoins or other cryptocurrencies through Bitcoin Exchange Platforms.
Coins are continuously being mined by miners to gain profits and trade. However, this increases the availability of these coins in the market, which leads to inflation. In order to maintain the high value of a cryptocurrency, the token issuers utilize certain methods that lead to a scarcity of coins in the market.
Two main methods utilized by token issuers to do so include the buyback-and-burn method. If you are into crypto trading, you deserve a world-class review of trading platforms and cryptocurrency.
What do Buyback and Burn of Coins Mean?
The buyback of coins is pretty similar to the buyback of stocks in the stock market, in which a company buys its own shares to create a scarcity of the share within the market, which increases the value of the shares. This also helps the company avoid hostile takeovers of the company.
In the case of cryptocurrencies, issuers of tokens tend to keep a chunk of the total number of tokens issued in their wallet, which creates a scarcity of the token in the market. This is done by repurchasing the tokens with their own cash and resources.
Thus, it is one of the methods that are used in the crypto industry to maintain the deflationary nature of cryptocurrencies.
On the other hand, the burning of tokens rids the blockchain network of the coins that are being burned forever. In order to burn crypto coins, they are sent to eater wallets that eat up the coins, forever barring them from entering circulation.
It is used by token issuers to create scarcity of a certain cryptocurrency in the market. The burning of coins, however, does not ensure that the value of the cryptocurrency will rise as well.
Both these techniques are used in tandem to achieve the desired scarcity of a certain coin in the market, which in turn helps enhance its value. An increase in value equates to the higher interest of investors in the asset, which further supports higher token sales.
Thus, the buyback-and-burn method, when used appropriately, can help enhance the value of cryptocurrencies in the market, which in turn benefits the investors majorly!
Many cryptocurrencies, including the Binance Coin and Bitcoin Cash, have indulged in burning coins. This is done by crypto developers, as it allows coins that started with huge supplies to gain value by decreasing their availability in the market.
However, it is also possible that developers with ill intentions might deceive investors into thinking that the coins are being burned while they are just being sent to a wallet that belongs to them. This can lead to scams as well, as investors get deceived into buying tokens with increasing values.
How Does it Work?
Crypto miners can burn coins by using the Proof-of-burn consensus. It is one of the several consensus mechanisms that are used to validate the genuine state and legitimacy of the blockchain network. It refers to the collection of several protocols that utilize various validators to validate a transaction.
It allows miners to burn crypto tokens, and the number of coins burned by miners gives them the right to write or mine blocks. PoB is poised to reduce the number of miners and the resources available for mining as well, which implies lesser competition as well. POB requires miners to lock up a certain part of their assets, which cannot be retained once they stop mining!
The main goal of the buyback and burn method is to reduce the supply of a cryptocurrency in the market. Buybacks are carried out to increase liquidity and reduce the volatility of its prices. It is imperative that highly scarce cryptocurrencies generate more interest than the ones that are available to the masses.
It can be stated that buybacks tend to increase the value of cryptocurrencies significantly. When an investor invests in Bitcoins or other cryptocurrencies that are left in circulation after the buyback and burn processes are carried out. Thus, one can state that these methods are very crucial for the crypto industry, and they hold the power to influence the market significantly.