Hot July for Crypto Market: Big Burning News is Coming

In June 2022, the whole crypto industry experienced one more wave of panic caused by the uncertainty around Celsius Network and the fear of further crypto value drop. Companies were forced to adjust their business processes to the new reality. Most projects keep on doing business as usual: they develop products, serve their clients, attend conferences, and speak with the community.

Although crypto winter is the period of uncertainty during which companies may experience deteriorating financial performance forcing them to cut their staff or pause big development initiatives, there are also companies whose performance has not been heavily affected by unfavorable market conditions. For example, at the beginning of June 2022, a Web 3.0 cybersecurity vendor Hacken made a post stating that the company fully reached its revenue target for May 2022. and would spend ¼ of this sum to buyback its native HAI tokens for their further burning.

What is the possible ROI of the decision to burn own tokens? Is it something new for the industry? Are there any examples of leading projects burning their tokens?

Let’s try to find answers. But first, we need to understand the historic concept of crypto winter and the theoretical background of the token burning process.

Overview of the crypto winter following sharp BTC drop in 2018

The last crypto winter lasted around 18 months and resulted in hundreds of projects disappearing forever. The previous crypto winter took place after the ICO boom and first bull run. At that time, tech and digital companies were experiencing prominent growth. The nature of the last crypto winter significantly lies in the unregulated market structure with just around 100 Daaps accumulating __>$800B__market cap.

During the bull run that started in December 2017, the crypto industry became a lucrative investment destination for retail investors. As a result, they were pulling money into unsustainable projects, 90%.) of which failed in less than 6 months after ICO. The massive sell-out was mostly caused by a large number of scams and failed projects. Do we see similar patterns today?

Generally, no. Countries have already adopted some forms of crypto regulation, scam is still a serious but not a disastrous problem, and the number of failed projects is limited.

The previous crypto winter demonstrated that the projects that had focused their efforts on product development and token utility improvement appeared to be the industry leaders after the end of the winter season.

What is token burning?

Burning crypto is the process of permanently removing a number of tokens from circulation. During this process, an entity, usually a company behind the project, transfers the specified number of tokens it owns to a burn address. The burn address is basically a dead-end wallet from which funds can never be retrieved. Thus, crypto burning is the destruction of tokens in a circulating supply.

Why do projects burn their tokens?

Algorithmic stablecoins burn tokens automatically to maintain the dollar peg when the demand is high. Apart from that, why would anyone want to destroy their own tokens? A project may decide to burn tokens to reduce the circulating supply. Based on the supply and demand law, when the supply of a product decreases and demand remains the same, the product's price increases. In other words, a reduced supply of tokens increases the token's value. The coin becomes more scarce.

In practice, token burning does not necessarily mean the price will increase overnight. After all, investors may factor in this event. However, token burning is positive because it indicates support for the coin. It also shows that the team will keep the future supply of tokens in check to prevent dilution.

Crypto winter 2022: examples of projects burning their tokens

Old Luna Burn

Not all crypto burns are successful. Let’s look at the example of Luna. After the violent collapse, some enthusiasts wanted to reduce the supply of Luna, hoping it would bring the price back. They burnt 280 million luna in 2,500 transactions. It was a drop in the ocean as the total supply of luna was 6.9 trillion. Even Do Kwon did not think burning was a good idea.

Binance

Binance plans to burn 100 million BNB from circulation, half of the total supply. In Q4 2021, Binance introduced the auto-burn formula designed to calculate the number of tokens for the burn automatically. The auto-burn mechanism is more independent of the chain’s centralized ecosystem but is still linked to the gas fees. Binance has already conducted 19 burns since its launch in 2017. In April 2022, the platform burned 1.8 million tokens worth approximately $742 million. Despite the burn, BNB's price has declined steadily since 2021, but other factors may explain the decline.

Hacken

On June 14, Hacken’s CEO Dyma Budorin made the following tweet: “In June, we allocated 25% of May's monthly revenue for $HAI buybacks. Expect a burn first week of a new quarter. We will continue to buy $HAI from the market every month.”In Hacken’s case, token burning aims to address the imbalance between supply and demand.

Hacken is the project generating income through cybersecurity services, the demand for which does not heavily depend on a season. As a result, the company is in a better position compared to the majority of crypto companies. While 1/4 of monthly income goes into token buybacks, the rest can be used to develop new products, introduce updates to company’s existing solutions, and improve token utility.

Shiba Inu

In April 2022, Shiba Inu launched the “burning portal” to reward Shib holders. The purpose of this portal is to motivate token holders to transfer their Shib to burning thereby reducing the token supply. More than 8 billion Shib tokens were burned within 24 hours of the portal launch. In exchange for their burned tokens, holders get burntSHIB tokens for rewards. 0.49% of all RYOSHI transactions will be distributed to burntSHIB holders. Shib burning has not had any significant impact on the token price movement.  ​​

Implications

These cases show an essential finding. Token burning will do nothing for a project that has lost any hope. No amount of burning would have helped old Luna. However, crypto burning can be a viable tool for a prosperous project that generates steady revenue but, of course, it does not fully guarantee the desired outcome since the factors behind the company’s control may impact the token price.

Generally, the state of the crypto industry today is resembling the traditional winter season. Projects are forced to introduce changes to prevent collapse. One of the main methods used by projects to overcome the token price implications caused by crypto winter is token burning. This method of token circulation control is not new to the industry and has been utilized by famous projects such as Binance, Shiba, and Luna. Recently, the cybersecurity company Hacken has announced massive burning of its native token HAI aimed at reducing the disproportion between demand and supply of its token in the market. Thus, token burning remains among the main instruments used by projects to support their tokens during the crypto winter.