The world of cryptocurrencies is not easy to understand. Although it is true that in some aspects it resembles the stock market, it is necessary to understand a series of concepts that are foreign to it and that are very important. One of them is the “burning” of cryptocurrencies, a phenomenon that is in fact very common for cryptocurrencies. We explain what the process is and why it is so important.
There is a key concept in real and tangible money that is inflation. This is caused when there is an increase in the price of services and items, something that results in the devaluation or loss of value of the currency. For the world of cryptocurrencies, there is a process to prevent this from happening, which is called “cryptocurrency burning”, and which was born due to a key characteristic of cryptocurrencies.
What is the burning of cryptocurrencies and how it occurs
Simply explained, the burning of cryptocurrencies consists of taking out of circulation a certain number of coins. One might think that this process may not make sense, since by removing or destroying these cryptocurrencies we would be “throwing away” something that has value, but the reality is that it is something fundamental. We must remember that, as a general rule, cryptocurrencies are infinite, so if we all mined a cryptocurrency from home, what we would achieve with it would be to make its value ridiculous.
As we say, this burning process consists of taking a finished amount of a cryptocurrency and sending it to a wallet to which no one has access, which is generally known as a “black hole” (or black hole in Spanish). This process, called Proof-of-burn, can be used by miners to gain access to mining cryptocurrencies. Basically, what these miners would do is “burn” tokens in order to have access to mine and get blocks at a much lower cost than they would normally have. This mining process is actually much better for the environment, since when we get rid of one crypto to get another we will hardly use energy.
Benefits of burning cryptocurrencies
The first conclusion that one can draw from the burning of cryptocurrencies is that with it a currency would be destroyed, as if, for example, we took a pile of banknotes and threw them into the fire. However, this loss of assets can have several benefits that are key to the behavior of the currency in the market. The main and most important is the possibility of controlling the value of this, stopping any type of inflation or deflation that the currency may suffer. We cannot lose sight of the Proof-of-burn system that we mentioned above, a much cheaper method of mining.
Furthermore, this burning of cryptocurrencies can be very good for investors (not so much for traders). These, who seek to retain the currency in their wallets for a long period of time, may see burning as a way to make it easier for the value of their wallets not to drop too much. In addition, this burning process can also be used on certain occasions to return cryptocurrencies to people who have lost them in unintentional transactionsdiverting some cryptocurrencies sent to those wallets without access.