Top Reasons Why Cryptocurrency Start-Ups Burn Coins to Increase Value
What would you think of a company that throws away revenue? It sounds completely absurd, but only when talking about conventional businesses. For a cryptocurrency entrepreneur, this idea can prove to be immensely profitable. The concept is referred to as creative destruction, as coined by economist Joseph Schumpeter. It is now a common practice for new cryptocurrency projects to actively destroy their coins to generate value for their investors.
This practice is a byproduct of initial coin offerings. As you probably know, an ICO is the most popular method through which new cryptocurrency projects gain funds for their developments by creating a scarce digital asset. What they do is to use their digital tokens to price their services. Once they have investors on board, they can change the economics of their money supply, which often comes in the form of burning tokens.
If you have invested in an ICO in the past, then you may have seen countless white papers specifically saying that tokens will be burned as they make their way back to the issuer as earnings. This may not make sense at first, but it has proven to be an excellent selling point for cryptocurrency investors. In fact, coins at that engage in this practice see some of the highest trade activity in trading robot such as Bitcoin Loophole.
Despite being orthodox in nature, speculators have come to love this business model. A prime example is Eidoo, a Switzerland based cryptocurrency. They had their ICO in November, and the company recently announced that 1% of the total supply of EDO tokens would be burned. This amounts to 920,000 EDO tokens which will be removed permanently from the circulating supply. And interestingly enough, the price of EDO increased by 40% right after this announcement.
For the company, this presents a win-win situation. The reason is that they have already earned tokens from helping start-ups run their ICOs using their app. Besides, they have more than 200,000 users to increase sales. The fact that they are also a major holder of EDO tokens means they wouldn’t lose in this scenario. According to Eidoo’s Amelia Tomasicchio, they are not creating a loss by burning 50% of the revenue, but they are creating value for the holders of EDO tokens.
The concept of creative destruction is relatively new, and it’s one that hasn’t proven to work over the long term. Industry experts, however, believe that such counterintuitive practices can prove to be the most profitable in an area of financial experimentation. Destroying millions of digital coins is an excellent attempt to manage how a certain economy would work. So far, it appears that the strategy works at least regarding attracting more investors to hold on to the coins.
It is reasonable to expect more companies to adopt the same approach. But according to cryptocurrency start-up advisor William Mougayar, projects that do not offer an in-demand product or service should shy away from it. Only those that can generate very high revenue in a short period can implement such a strategy.