Very few, if any, other cryptocurrencies are used quite the way Binancecoin is used. This token, like no other, is meant to appreciate. It is engineered to appreciate, it can’t help it. Binancecoin is the Binance Exchange mechanisim for returning value to its “shareholders”. The shares are tokens of BNB, BinanceCoin, the mechanism for returning value is the coin burn.
A coin burn is when tokens of a known cryptocurrency are publicly and permanently sent to an irretrievable and unrecoverable wallet address. The practice in essence creates an escrow account for holding value that can be used in a number of ways. One way to apply the coin burn principle is to launch a new cryptocurrency. Say, for example, you had $1 million in BTC and wanted to start your own coin, I’ll call it the MichaelHodges coin. If I burn $1 million in BTC and use it to launch 1 million tokens of MichaelHodges coin they will each be worth $1.
In Binance case, the company is using the coin burn as a way to give money to the market, a share of its profits. To do this the company must buy it’s own BNBs. Buying BNBs, especially in the quantities Binance is doing, is enough by itself to support the market. When Binance burns the coins they have supported price by purchase and then decreased the tokens availability making it rarer and even more valuable.
How does the Binance coin burn work?
The BinanceCoin burn is really very simple. Binance is a 100% web-based cryptocurrency trading platform. It is a full-service, multi-device, multi-language exchange for buying and selling cryptocurrencies and performing atomic swaps (exchanging one cryptocurrency for another). The company launched BNB, BinanceCoin, as an Ethereum-based ERC-20 token. The token had an original supply of 200 million and one purpose; to serve as a vehicle for returning funds to shareholders. The company plans to burn 50% of all BNB over the next few years and has already burned nearly 6%.
Binance is going to burn the coins on a quarterly cycle based on earnings. Each quarter the company will burn an amount of BNB equal to 20% of net profits. The last burn was just a few weeks ago and took 830,000 BNBs off the market. At 20% of net profits this implies a 66% increase in YOY earnings compared to last year. To get in on the deal all you have to do is own some BNB and hold it. Each quarter the prices of the token should rise as BNBs become scarcer.
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What the coin burn accomplishes is so much more than just returning value to holders. The fact you need to hold BNBs to participate encourages the number one driver of digital token value; ownership. The coinburn encourages holders to keep holding and as the word spreads those holdings will grow, and new holdings will emerge. This cycle will further tighten the market until Binance has to pay what the market is willing to sell for. What I predict is a parabolic increase in prices that will take BNB to news highs again and again over the next few years.
At the current rate of burn it may only be 3 or 4 more years until all the BNBs that will be burned are going to be burned. The problem with that outlook is that it doesn’t account for a rise in BNB prices. As BNB becomes more valuable Binance will have to buy less and less BNBs at each burn which ensures this scheme can last for many years, possibly decades.