The Fallacy Of Token Burns And How It Affects Economic Growth
Do you think token burns are a good thing?
We all know how excited people get when the token of their choice announces a burn. After all, this gets the market going bonkers.
Unfortunately, token burns show how messed up the thinking is within the cryptocurrency realm and how little people truly understand. When trying to build a new financial system and forming an economy around it, this is insane.
Let us phrase this another way: do you think it a good idea to burn money?
Does that help us reframe the situation?
In this article we will uncover the fallacy of token burns and how it is hindering the overall growth of the industry.
The Theory of Token Burns
It is best to start with the theory behind a token burn.
This stems from the idea that inflation is bad. That is where it all begins. After all, if there are more tokens each year, then each is worth less. Of course, we have to highlight at this point how it encapsulated most of the thinking within cryptocurrency.
We have a parallel to the token burn in the stock market. This is akin to stock buybacks. The market goes crazy when a company announces a buyback. Here we see shares removed from the market, meaning the holding each individual account has grows as a percentage.
So far, a token burn is right on track.
Or is it? We just painted the stock market with a broad brush. Does this happen in every situation? The answer is no.
When a company is losing money and takes on debt to do a stock buyback, the market sees right through it. The financial engineering that is taking place by management becomes obvious. Instead of growing the business they are simply trying to pump the stock price.
Stock Expansion
If token burns are good, then expansion (or inflating) is bad.
Once again, we have an analogy with the stock market. It is true that it often gets excited about stock buybacks. That said, do you know when it goes crazy?
When a company announces a stock split, the market eats it up. Why is this?
In theory, nothing should change. With a split, the number of shares double, halving the price. Thus, 25 shares of a $100 stock would end up as 50 shares worth $50 each. The holdings in each account are exactly the same.
The market goes crazy because it knows that each incremental increase in share price, say one dollar, is now worth more in total. Under the first scenario, a $1 move grew the account by $25; with the second we have a $50 change.
Again, in theory, this should not be any different but markets do not operate in this manner. Research shows that the overwhelming majority of stocks perform better after splits.
This blows a hole in the idea that we have to have deflationary tokens for them to grow in value.
What Is Missing
The problem is that a garbage company is not going anywhere doing a stock buyback or split. It is nothing more than financial engineering trying to manipulate the market into believing something is happening.
Here we have the missing link. There is no growth taking place. The company is basically dead. Value is not being created meaning the market is going to eventually reflect that. Look at a company like Sears and compare it to Amazon. Do you think that stock buybacks will help the former?
If we go through the cryptocurrency industry, we see the same problem. Everyone is talking token burns like it is a good thing. Headlines are made when Shiba Inu or Ethereum announce their latest burn tokens. Again, is burning money good especially when it comes to building an economy? Is the destruction of assets really the approach to take?
Obviously, it is a lot easier to try and engage in financial engineering as compared to building. This is where the industry misses the idea of an economy. We talk about banks, often negatively, without mentioning what they do and how they impact things.
Leverage
Leverage is one of the most powerful aspects of the financial world. It is also crucial if we are going to design a system that replaces what is presently in place.
This is another misunderstood concept. Leverage is powerful and of enormous benefit. It is over leverage that is catastrophic.
The best example is housing. That is an industry that is almost completely leveraged. The overwhelming majority of people take an asset, the property, and leverage it through a mortgage. Does anyone believe this is not of benefit? Are there people saying we need to eliminate mortgages as they are dangerous?
Obviously, there are risk associated with debt. However, people are very willing to use the value of an asset to leverage it in a way that provides financial benefit.
At the same time, we know the economic benefit to the housing market. Real estate makes up a large percentage of most economies. The difference is most people do not really view real estate as leveraged. Yet, the taking on debt to purchase an asset in hopes of future gain is what leverage is. The fact that people live in the asset does alter things to a degree but cannot eliminate the basis of the financial transaction.
Of course, one vital aspect to this is the concept of collateral. To acquire the debt, in most instances some form of collateral is required.
Burning Money
If we flip the term cryptocurrency to digital assets, does this paint a different picture?
Why is burning an asset that has value a good idea? Are we not better off, from an economic perspective, being able to utilize that for productive purposes?
The answer is clear.
Unfortunately, few look at things through this lens. The action is not to burn tokens. Instead, the focus should be on building the tools so that people can collateralize their assets and receive money that can be put towards other financial and commercial endeavors.
How many have you heard in cryptocurrency discussing this?
Another way to frame this: how many token burn projects have you seen be truly successful? When we look at the track record, we tend to see things as they are unfolding.
The reality is the results from token burns are not great. Those entities that have repeatedly engaged in this do not appear to be thriving. We would not call those expanding economies.
Financial engineering, whether done by Wall Street or cryptocurrency projects, is just that. It is a way to try and manipulate markets. That isn't to say that splits or buybacks are not valid tools. They are. However, if that is all a company is relying upon, then there are issues.
The same holds true in cryptocurrency. We often talk about the idea of looking at this as economy. Where is the growth coming from? What is being built that adds value?
One of the points raised is we need more money? Here is where the proverbial facepalm enters. People claim more money is needed yet are all for burning assets that could be leveraged for more money.
Can we see how misguided this thinking is?
One of the services banks provide is to take assets and turn them into working capital. It does this through offering credit, another term for debt. At that point, entrepreneurs and business executives utilize the resources to grow their endeavors, providing greater economic productivity than was started with.
Once again, how often do we see this in the cryptocurrency world?
We hear a lot about token burns yet very little focus is upon building economies around these systems.
When we look at it closely, we can easily see why.
Instead of focusing upon token burns, we should be looking at how to create value and put it to work. That is now economies expand.
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I actually agree to your thesis. I mean what good is a token burn if there isn't enough value backing it in the first place?
That is to say, if work is actually done and real value is created around the tokens then there would be no need to burn said tokens in the first place.
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If tokens are actually value capture devices, perhaps the focus should be on building value.
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I am not a supporter of token burning at all. I believe that the fundamental thing is to create value for the token and that more people want to own it. That way it becomes scarce in a natural and healthy way.
I think in case of problem like a hack or something like that and a project need to burn token to get is prehack value it's okay, but excepte for a hack tokens need to gain value with the growth of the token not only the destruction of the token
Interesting article. I agree with most of your points, however, I would argue that mortgages(housing leverage) is the primary factor in why housing is no longer affordable for the majority of people.
When you can "buy" a house using a mortgage, the effect is disastrous for anyone looking to truly own a home. It causes hugely inflated prices because getting money to "buy" a house is too easy.
I would also argue that most people who think the mortgage/home loan situation is good, either don't understand what's going on, or they already have property so they are beneficiaries of the inflated prices.
I would say urbanization is a bigger cause of rising prices.
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I have also examined the burn procedure with a hands and shoulders raised viewpoint. I think it would be better to treat it as a 'return to source'. Meaning, staked coins come from the burn pile first, before any new minting takes place.
Money does 'burn' to a certain degree. Money is lost or the banks destroy old bills and then print new bills to replace them, but that's not representable in a digital currency standpoint. Crypto wallets can be lost. I suppose some mechanism to introduce coins to compensate for those losses, even if eventually found and reactivated, could be coded in some way.
Just random thought befoe I run off for my day of labor.
Specifically about this point: it's an inverse causation. It's not the split that makes a stock perform better.
Stocks that are already performing well are exactly the ones that do splits, because the price of the stock has increased too much in the past and, thus, it's becoming too expensive for retail, small-investors to buy just a few of the shares. They do the split to avoid this problem.
When you burn a token, you do not reduce its demand. So what you are doing in fact is redistributing that wealth to the token holders proportionately to the amount they hold.
This entire article relies upon the idea that cryptocurrency is to be used as money. Indeed, that was the exact intention of Bitcoin and subsequent cryptocurrencies. It feeds into the basic functions of money: store of value, unit of account, and a medium of exchange. Your focus was specifically into the first aspect, adding value.
Cryptocurrency is still in its very early stages, so it'll take time until the industry grows past the "asset/security" stage that regulators are clearly so intent upon, and into actual functional money. Hive and Leo are clearly adding value and functionality, which is why I believe in their long-term growth and potential development into forms of money.
Great insights, as always. 😊
Good insights. I've always wondered about the benefits of token burns.
The misconceptions on inflation are very real too. One of the most common questions by newcomers is "How can Hive be sustainable if there is inflation?"
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The idea of SIP from the SPK Network gave me a different perspective on token burns, a deeper look tells us it is a cheaper way to push the price of tokens up which isn't going to be a lasting effect.
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I have learned from this piece that token burns may not be as beneficial as they seem on the surface. It's only for short term price movements and does not have any long-term positive implications, which may hinder the growth of the cryptocurrency industry. This post was an educational piece for me.
Depends. If a token has no cap, it continues to be issued. Burning is not a problem, burning is a buyback.
The truth of creating the digital token and then burning isnt a good idea and if banks form the space to leverage money - it would bear a good value too.
The entire cryptocurrency industry relies on what financial engineering are done in wall street, the cuts and new principles of balancing, regulating and fostering growth allows what price the btc and other coins have time to time.
Maybe, someday banks would adopt the payout of btc rather than conventional money,thats futuristic but -tangible.
While I think that tokens burns might help with asset scarcity, the root cause of that is the huge supply that some projects have. Throwing billions of tokens out in the open while the project is not scalable and can capture just a small portion of the market with its use cases is the one thing that should be corrected. If that would be done, nobody would use burning mechanisms as those wouldn't be needed in any way.
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SNX on evm? They have the right idea.
I totally agree with you. For me I don't think burning taken is a right option to do
Burning is one of the dumbest stuff in cryptocurrency. I really don’t see any good apart from the fact that you get to create more space for other tokenZ.
Instead of burning, there should be a system that rewards instead thereby making the token in continuous circulation and commercially active
Yes Taskmaster4450 it is weird and insane to have a token burn. I read the definition and commented it was weird and how people are very strange. I will read your entire article. People are totally insane. Oh and it's stupid too.
Barb :)
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Hi Taskmaster4450. I finished reading your article on the token burns. It is just so destructive! Totally insane. The market is so manipulative. They are crooks in my opion and yes just a big game on peoples lives. Maybe these people are on so high on drugs they can't even begin to empathize and see what the true wealth is. True wealth is not made by manpulating people or playing games with peoples lives or the state of the wellbeing of the earth. We have souls, animals have souls, the earth has a soul. We are lucky to be here on Hive with leaders like you and Jon that really care and believe in doing what is right for humanity and the earth.
Barb :)
!BBH !CTP
I don't think a burn as a good or and thing but if I had to pick only one, then I am against the burns most of the time. It depends more on the utility of the token and how the tokens can generate value. For example, I think liotes is quite good and they burn tokens as part of the model. Of course, that burn is done by some of the revenue the project has generated.
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Your insights on the fallacy of token burns and economic growth are appreciated. You have valid points about how burning tokens is not sustainable to increase value and demand. I agree that more utility and activity are the key to grow the Hive ecosystem. Thanks for sharing your knowledge and perspective. 👍
The analogies you use from traditional finance help me understand token burns: inflation, buyback, stock splits, and leverage.
Your description of leverage is accurate. I think that's what it truly is:
And then the role of collateral in acquiring debt. I am now thinking of a huge unproductive asset of our school left unutilized due to fear and lack of financial IQ on the part of the administration and members of the BOT.
Yes, we need working capital to grow both our active and passive income as an institution and I hope in the coming months, I will be able to convince them.
I want to end with this paragraph to serve as my notes:
Thanks!
!PIZZA
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Collateralization is certainly not without risk. Getting a loan against an asset means that you have to get a better return on the money than you are paying in interest and not fall victim to loss. It can be done conservatively if desired.
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Yes, that's what I have in mind. Taking such a risk is better than the other kind of risk of leaving an asset idle that yields nothing but grass. 😆 !LOLZ
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The problem becomes when token inflation is bigger and faster than value creation. Then burning tokens is the equivalent of the FED raising the debt interest.
Other thing, infinite grow of money is not responsible. Will come the moment when you will not continue creating value for sostain the price.
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