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.
If you found this article informative, please give an upvote and rehive.
gif by @doze
logo by @st8z