On the 15th of April, Binance conducted its third burn event – reducing the total supply of its native token, Binance Coin (BNB), by 2.2 million ($30 million equivalent). The price and volume movements prior to and after the Binance Coin burn event saw a rise in volatility, which prepared and experienced traders took advantage of. As history tends to repeat itself, and the next burn is coming up on July 15th, is it a good idea to capitalise on these events?
What are token burns?
Coin burns are, to some extent, similar to share buybacks used in the traditional corporate world. Simply put, listed companies buy back their shares from the market, which in most cases results in the shares’ price appreciation as those shares are removed from the circulating supply. The share buyback scheme is a way to reward shareholders’ (as companies avoid paying dividends). However, companies might decide to buy their shares for other reasons, such as restructuring their financial ratios, consolidating ownership, or to benefit from a perceived undervaluation as the companies are able to reintroduce the shares onto the market at a later point.
In the cryptocurrency ecosystem, in the same way as in corporate finance, projects might decide to buy back their tokens. Some projects, such as Huobi, lock the bought tokens into a fund for later use, while others such as Binance (BNB), Tron (TRX) or Substratum (SUB), decide to burn the tokens by sending them to an invalid address which does not have a private key. While the former is very close to a share buyback scheme, the later has a more important impact on price as the tokens are indeed “destroyed”, and will never be circulating again – and the supply decreases forever.
In the case of Binance, each quarter, the exchange uses 20% of its profits to buy back its native coin, BNB, from the open market, and “burns” them by sending the coins to the aforementioned unrecoverable wallet. This process will continue until 100 million BNB are burnt (half of the total supply), with 5 million already burnt. The burn is Binance’s way of redistributing some of its profits to its community, as ultimately in the long-run, the aim of the burn is to increase the token’s value.
Impact of coin burn on Binance Coin burn and what to expect for the next one
From the chart below, it is clearly shown that Binance Coin (BNB) has been on an uptrend since inception when compared against BTC. The trend is hardly surprising as the exchange has rapidly and strategically grasped market share, to become the world’s leading cryptocurrency exchange by daily volume.
One of the strategies which paid off for the exchange was the early offering of coins and tokens, such as Waltonchain (WTC), despite the Chinese ICO ban – leading to many people signing up to the platform to gain access to them. Another reason for Binance’s success is the team’s responsiveness to changes in regulatory frameworks, as over the last 9 months the team changed its location multiple times (China, Hong-Kong, Japan, and soon Malta). The team also capitalised on the power of the community, such as allowing people to vote for coin listings (using BNB tokens), and enabling people to gain access to their “gas” (payouts made by holding certain coins, such as NEO in this case) which Bittrex, one of the leading alt exchanges, was not doing at the time.
Having an overview of what a coin burn is, and who Binance is, we can now dig into Binance Coin burn events, and see if they present a buying opportunity.
Ref: Trading View
The first BNB coin burn, which occurred on the 18th of October 2017, saw approximately 1 million tokens being burnt. As displayed on the chart, Binance being a small exchange at that time, the burn had little impact on the coin. This is mainly explained by the fact that as a Chinese exchange, Binance had many uncertainties and fears surrounding the state of its operations. Additionally, the exchange’s revenue and customer base was still small; therefore, the BNB token had little attractiveness to investors.
The second burn, which destroyed 2.2 million tokens, occurred on the 15th of January. At the time, Binance was already one of the leading crypto exchanges. Prior to this period, Binance increased its user base with the help of a referral program, and even had to refuse new ones in early January, leading to an increased demand for BNB tokens. This time, the burn had the expected effect: a pump leading to an all time high (current resistance), with an expected selloff a few days before the Binance Coin burn.
However, during this period, Bitcoin was on a massive bull run that led to it reaching a $20,000 high; therefore the market was overall pushed to new highs, and it was close to impossible not to make money within the cryptocurrency market. This could also explain the rise of Binance Coin, as during these times, the halving of trading fees was likely also very attractive to the many active traders (as holding BNB coins permits you a 50% fee discount).
Lastly, the third burn had a similar pattern to the second one. This time, news surrounding Binance was more regulation-related than user growth and BNB usage-related – with not only Binance disclosing their intent to move their operations to Malta, but also the future launch of its own chain, powered by BNB. However, the classic “sell the news” occurred, this time a dozen days prior to the burn; whether this is true correlation or just coincidence – as usual in the crypto markets, nobody truly knows.
However, it is worth noting that despite the BTC crash, Binance managed to reach its all-time-high resistance from the previous burn. Seeing the coin comparatively stable while the rest of the market has crashed (for example, ICX lost more than half of its value since ATH) is bound to be reassuring to investors and traders alike, and the steady growth that can be seen on the chart above is testament to that.
From the chart and analysis above, it is difficult to determine what the correct strategy to undertake is when it comes to trading the BNB coin burn news. The first burn had no impact on BNB’s price, the second played exactly the way we would expect it to (“buy the hype, sell the news”), and the third one sold off a week prior to the event, possibly due to the expectations, and traders taking profit beforehand. However, due to the non-stop good news for the exchange, it is hard to separate the effect of this news, that of the burn anticipation, and just regular, independent market movement. We would even go so far as to say that the burn has a negative effect on Binance Coin, as, from what we have witnessed so far, the expectations concerning a sell-off are so strong, that it becomes a self-fulfilling prophecy.
A trade worth making?
As with all trading strategies, as more people become aware of them, the strategy becomes less effective. Therefore, we would be cautious in regards to trading the next burn, and burn events in general, as it is difficult to forecast price action.
Nevertheless, we still believe BNB is primed for future growth, as the Binance is preparing itself to comply with European laws, is about to become a fiat gateway (accepting fiat deposits and withdrawals), and is preparing a Decentralised Exchange (DEX) which will run on its own chain and be powered by BNB – increasing BNB’s use cases and likely value.
Disclaimer: We are long BNB.