Antpool, a Bitcoin Cash mining pool, who composes 8.2% of all Bitcoin Cash transaction confirmations, announced via Twitter and Facebook that they will “burn” 12% of the Bitcoin Cash fees it receives.

Burning a coin or token essentially means sending the coin/token “to a black hole address” where it will never be accessible again since no one controls the private keys anymore. The move was seen as a strategy to artificially increase the price of Bitcoin Cash by artificially decreasing the supply. While correlation does not necessarily mean causation, since the announcement, the price of Bitcoin Cash has risen over 25%.

The move comes as Bitcoin Cash’s main comparative advantage, larger block sizes and thus cheaper and faster transactions, has less immediate importance since the Bitcoin network is no longer backlogged with pending transactions raising the transaction fees and confirmation times. In addition, it should be noted that trust does need to be placed in Antpool that they will actually burn the Bitcoin Cash they receive and not simply hide the coins in an unused wallet only to be taken out a few years down the road.

Economics of Cryptocurrencies

The laws of supply and demand permeate throughout the world, especially within the cryptocurrency world. Since Bitcoin Cash has a limited number of coins that will ever be issued built into its code, burning coins will artificially decrease the supply. As long as the demand either remains constant, decreases less than the decrease in supply, or increases then price of Bitcoin Cash will increase. While the exact effects cannot be predicted with perfect certainty, parallels can be drawn to other economic scenarios.

There is a high likelihood that this action will actually harm Antpool as a business and help other consumers. A common fear in the physical world is that a hopeful monopolistic business will undercut competitors in price until their competitors go out of business, only to jack up prices afterwards and thus leave consumers with no other choice than to pay the higher prices. However, this has rarely happened throughout history. In most cases, the hopeful monopoly either attempted to undercut competitors by subsidizing prices until they themselves, the hopeful monopoly, went out of business or if they did achieve a monopoly, once they attempted to raise prices new entrepreneurs entered the market to offer those same products at lower prices. This relates to the Antpool scenario in that their attempt to artificially raise the price will have a high likelihood of harming Antpool because they will receive less profits and will help Bitcoin Cash consumers who do not participate in the burning of coins, yet still receive the higher price. In addition, Antpool’s actions could also end up helping consumers of other cryptocurrencies that do not take the same actions since consumers will be able to evaluate with a higher degree of certainty how much of their coins’ price is based on actual value instead of artificial increases.

Prices fluctuate based on supply and demand, but since most cryptocurrencies have an upper supply limit, that places a time and magnitude limit on the amount a coin can be manipulated on the supply side through burning coins before it begins to detrimentally cannibalize itself. At the time of writing, Bitcoin Cash has already issued around 84.45% of all the tokens that will be created under its blockchain, Bitcoin is around 81.01%, and Dash has only issued around 42.48%. The more coins left to be issued allows for more flexibility in price development. However, there is a another aspect to the economics of cryptocurrencies other than manipulating price and that aspect is incentives on the demand side.

Dash is producing incentives to demand Dash

Dash has been placing an emphasis on usability and getting consumers to use Dash in everyday transactions no matter how small and/or how often. This has been done through carefully aligned incentives from the split between miners, masternodes, and the treasury, to funding proposals, to maintaining low transaction fees and fast confirmation times, to person-to-person assistance. These incentives have encouraged larger and wider adoption, which have been growing at fast rates.

The same laws of supply and demand apply here, but from the reverse; increase demand faster than supply and the price will increase. However, growing the demand side of a cryptocurrency, through production of valuable services, is more sustainable than manipulating the price with the supply side of cryptocurrencies since most of the top cryptocurrencies are limited in quantity by their core code. The growth of the demand side can grow up to and with the use of currency by the world’s population, whereas the supply side can only shrink, at a maximum, by however many coins will ever be issued. While Dash does not control what every miner does, Dash does incentivize them to focus on producing valuable services for consumers.

Dash has structured itself to focus the attention of developers, miners, stakeholders, and early adopters on creating valuable services that build off of Dash and use Dash in exchange for goods and services from other individuals. This produces value for consumers, which shifts their economic decisions to forgo other goods and services, including other cryptocurrencies, for using Dash.