Binance Coin (BNB) is a cryptocurrency that was launched by the Binance cryptocurrency exchange in 2017. One of the key features of Binance Coin is its quarterly coin burn, where Binance buys back and destroys a portion of the circulating supply of BNB. This coin burn mechanism helps reduce the total supply of BNB over time and is an important factor that impacts the price and valuation of the cryptocurrency. In this article, we’ll take a closer look at how Binance Coin burns work and how the burns affect BNB price based on basic supply and demand economics.
What is a Coin Burn?
A coin burn simply refers to sending cryptocurrency coins to a public address where they can never be spent. These coins are effectively removed from the circulating supply, reducing the total supply. Many cryptocurrencies incorporate coin burns into their protocols as a way to manage coin supply and potentially increase value.
For Binance Coin, the coin burn occurs every quarter and Binance uses 20% of its profits from the previous quarter to buy back and burn BNB tokens. These BNB tokens are sent to a permanent burn address, removing them from circulation forever. The result is the total circulating supply of BNB decreases over time.
Impact on Supply from Binance Coin Burns
The coin burns have a direct impact on reducing the supply of Binance Coin. With each quarterly burn, the portion of BNB tokens removed from circulation further constricts supply. For example, in the most recent 15th BNB burn in October 2022, Binance burned 2,061,888 BNB, equivalent to over $300 million at the time.
This single burn reduced the total BNB supply by 1.02%. While that may not seem significant, the burns compound over time. In total, Binance has burned over 2.5 million BNB worth more than $6 billion from its quarterly burns. This has decreased the total supply by over 39% since the first burn in 2017.
As the coin burns continue, they will keep decreasing the circulating supply at an exponential rate. With a lower supply, any increase in demand can have an outsized positive impact on the valuation and price of the remaining Binance Coin in circulation.
Impact on Price from Lower Supply and Constant Demand
The main impact of the lowering BNB supply from coin burns is upward pressure on the BNB price, according to basic economic principles of supply and demand.
All else being equal, when supply decreases while demand remains constant, the equilibrium price will increase. With fewer BNB tokens available on the open market due to coin burns, but steady user and investor demand, buyers compete for the more limited number of coins. This pushes the price up until a new market equilibrium is reached at the higher price level.
Over the long-term, as the coin burns accelerate and supply constricts further, buyers have to bid up the price more and more to secure the continually declining amount of BNB in circulation. If user adoption and demand for BNB remains constant or even increases over time, its valuation will continue rising in conjunction with the dwindling supply from burns.
Potential for Speculative Feedback Loop
Not only do the coin burns directly impact supply and demand, but they can also set off a self-reinforcing speculative feedback loop for the Binance Coin price.
The guaranteed coin burns essentially act as programmed supply shocks. As investors anticipate the looming supply reductions, it adds to speculative demand for BNB, further driving up prices.
This price increase gets new investors excited about expected gains, bringing in more capital and creating even further demand. If this cycle feeds on itself, it creates a feedback loop where coin burn expectations increase speculative demand, leading to higher prices, which then attracts more speculation.
While difficult to predict, this type of self-reinforcing cycle based around anticipated coin burns could magnify the impact on Binance Coin’s valuation. The result is pump in price not just from the direct supply reductions, but also from speculative mania.
“The coin burns make BNB one of the most intriguing cryptos for long-term holders. With every burn, your share of the total supply increases. It’s like getting free token airdrops as a buy and hold bonus.”
Can Coin Burns Increase Demand?
Up to this point, we’ve assumed demand as staying constant in our analysis. However, it’s possible the coin burns themselves could actually increase broader demand and usage of BNB. Some potential ways include:
- Increased media coverage and investor interest around the coin burn events, sparking more awareness of BNB in general.
- Signaling by Binance about the long-term potential of BNB through the demonstrated commitment to reducing supply via burns.
- Further utility being added to the Binance Smart Chain ecosystem, where BNB is used for transactions and fees.
Any pickup in demand from the burns themselves would be additive to the underlying supply reductions and provide further upside price potential.
New Knowledge: The Lindy Effect and BNB Burns
An interesting perspective is analyzing the BNB burns through the lens of the Lindy effect. This concept says that the future life expectancy of a technology is proportional to its current age. In other words, the longer something has survived, the more likely it is to continue surviving into the future.
From this view, the decreasing supply from coin burns may signal “Lindy” qualities for BNB. The longer it persists through rounds of supply reductions, the more entrenched it becomes, increasing confidence in its longevity. This engenders more demand, which further cements its staying power. It’s possible the burns could make the Lindy effect self-reinforcing for BNB, increasing its price and adoption well into the future.
- How much can the long-term supply decreases from Binance Coin burns realistically drive the price up?
- Could regulation limiting coin burns affect Binance Coin's valuation model?
The quarterly BNB coin burns have a significant influence over its long-term price potential. By consistently decreasing supply, the burns structurally support higher prices if demand remains constant or grows. The programmed supply shocks can also spark speculative feedback loops, amplifying upside price movement. While difficult to forecast magnitudes, the burns appear directionally bullish for BNB holders. However, changes to allowable burn amounts from regulators would negate some of these mechanics and necessitate reassessing valuations. Overall, the burns plus speculative activity point to BNB maintaining an intriguing risk-reward profile as crypto adoption increases worldwide.