Coin Burns Primarily affect Price by Increasing Demand; the Supply Effect is Negligible: Part I, BNB

A “coin burn” happens when some portion of a coin-type is intentionally removed from the supply.

Coin Burn: permanently removing coins from the supply.

Simple Adverts

First thing is first: coin burns are an advertising technique. You don’t have to troll around on Twitter long to find coins that boast their burns:

Typically, these adverts will cite impressive numbers or percentages of coins burnt, to anticipate/demonstrate how great the economic impact of the burn will be:

“8.8 Billion” out of how many ?!?

Coin burns are effective advertising because the concept leads to the perception of scarcity, increasing demand and price, and thus is incredibly popular with bagholders. In an informal Twitter poll by Dentacoin, three-quarters of 255 respondents supported the Dentacoin burn, with most of the non-supporters voting that way because they don’t understand what a coin burn is. (only 5% truly opposed). Other coins have had similar reactions.

So clearly coin burns are a good way to draw in crypto buyers. Besides this advertising value, how do the economics of a coin burn work? are they always good for price? and should I insist that my next pet project conduct burns, or is it all just smoke and mirrors that begins and ends with advertising value? (tl;dr: yes, that last one)

“Natural” Supply Reduction

Coin supply naturally trends down over time due to several factors:

(1) people lose private keys, Ledger/Trezor PINs, and hardware required to access coins.

(2) people die without a contingency plan (which is basically a version of #1, lost keys),

(3) people intentionally destroy coins, and

(4) people abandoned coin “dust.”

So coin supply will necessarily trend down with time, even without intentional burns.

Intentional Coin Burns

The largest market cap coin (and the first I came across years ago) to conduct regular burns is(was) Binance Coin (BNB). CZ’s plan was elegant: Binance would use a portion of its profits each quarter to buy-back and permanently destroy BNB, which would benefit BNB holders whose coins would increase in value due to supply and demand (constant demand + decreased supply = increased price).

Ad for Binance’s 6th quarterly coin burn, Q4 2018. Approx. 1–2M BNB have been burned per quarter over the last six quarters.

So far, things have largely gone to CZ’s plan: each quarter Binance burns around one to two million coins; around 1% of the circulating supply of BNB (~150 M BNB), and generally over the past 9 quarters BNB price has trended upward, topping out at $37 less than 6 months ago on June 18, 2019.

Despite all this attention to the “millions of coins burned” (heck, BILLIONS in Apollo’s case kek kek kek) the overall effect on circulating supply of BNB is very slight. Binance even backed off its commitment to buy coins from the open market, instead opting to burn coins pre-allocated to the dev team rather than coins in open circulation, completely removing the “cause” (decreased circulating supply) from the cause-and-effect equation that supposedly boosts price.

On the date of Binance’s first burn of 986,000 BNB’s in Q3 of 2017, the price of BNB after the burn was $1.50. Thus far, there have been 9 quarterly burns, removing 7.44% of the initial supply, and the present price of BNB is just under $15 with 151,536,713 circulating supply. While the burns are loosely associated with increasing prices, it is difficult to imagine that just by removing one out of every dozen BNBs from the market, CZ caused a10x increase in price. More likely, the burns create a perception of scarcity — they are to BNB what the mantra “21 million” is to bitcoin maxis: a rallying cry that calls out to the investment dollars in your pocket. In the end, coin burns exert their influence on the market by affecting the perception of scarcity (= demand), the effect on supply is de minimis; negligable; inconsequential.

What about other coins that conducted burns? similar situation? Kyber and Maker both conduct coin burns like Binance Coin, but on a more continuous basis. In Maker’s case, as Dai loans are cashed in, Maker is destroyed. I’ll do some research and address those in a Part 2.

[Disclaimer: The author does not work for any cryptocurrency company, does own BNB, does own cryptocurrency, and his opinions, which are his own, are merely that — opinion only rather than investing advice. ]

Employment law lawyer. Former biochemist. Explorer of blockchain, IoT, AI, sensors, patents ,& big data. I believe that cryptocurrency will change the world.