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Most people have misunderstood the destruction of platform coins and the halving of mainstream coins.
BlockBeats has observed that many people have seen the recent popularity of “destruction” of platform coins and have rushed in. When asked why, they will tell you that the supply of platform coins is small, so the price will rise.
Is this statement really reasonable? What is the real value support of platform coins? Where is the biggest black swan risk?
Halving hype is another hot topic in early 2020. Is there any inherent logical connection between "platform coin destruction" and "mainstream coin halving (production)"?
The origin and development of destruction The "destruction" of platform coins originated from the extension of the "profit repurchase" behavior of the trading platform, that is, the trading platform takes out a part of the money it earns, buys back the platform coins in the secondary market (part of the profit may be the platform coin assets themselves), and destroys them permanently, thereby achieving a token economic model of "supply reduction within a limited range".
The recently emerging platform coins and destruction have a new way of playing. They directly destroy the token shares originally belonging to the team, thereby sharply reducing the total number of tokens, increasing the circulation rate, and forming a deflationary economic model.
"After I saw these announcements, I immediately bought the platform coins. As the supply decreased, the price of the coins would definitely go up, and I made money." Retail investor Xiao Wu told BlockBeats, which is also the general idea of investors.
However, this is not the essence of the matter. What really caused this wave of short-term surge in the platform currency sector was not the reduction in supply, but the increase in demand.
Why?
Let's take the simplest example. If you sell high-quality masks in hospitals, they will definitely sell well, because there is a real demand for them in hospitals, and the demand for them is extremely strong, and consumers are willing to buy them at a reasonable premium.
Let's do a thought experiment. Suppose you go to the hospital and sell socks instead of masks, no one will pay attention to you because there is no real demand. And this has nothing to do with how many socks you have. Whether it is 100, 200, 10 or 20, no one will buy them.
At this time, you thought of a way. You secretly threw away 90 of the 100 pairs of socks that could not be sold, and announced to everyone that the remaining 10 pairs of socks were worn by Messi. Buying these socks not only has collection value, but can also be exchanged for the right to meet Messi in the future. Finally, some consumers began to buy the socks that you could not sell, and were willing to bear a high premium. Some of them really valued the appreciation value of these socks, while most people valued that there are many fools in the world who are more foolish than themselves.
Let’s look back at platform coins.
For platforms that have no potential for sustainable development in the future, the truth behind the destruction of platform coins is nothing more than "selling Messi's socks." No one wants the excess platform coins (lack of real demand), and they cannot be dumped in the secondary market (poor liquidity). At this time, it is a good idea to tell a "destruction" story to promote the influx of speculative buying, cooperate with the platform's own accumulation of funds in the early stage, complete the market pull-up, and in the eyes of leeks, it can be said to be a double gain of fame and fortune.
Johnny Lyu, co-founder of KuCoin, also commented on the destruction of platform coins. He made it clear that KuCoin's platform coin KCS will not follow suit. "The recent destruction of platform coins is a very obvious short-term speculation, especially the large-scale destruction of uncirculated tokens, which is more in form than in practical significance. We are more concerned about enhancing the intrinsic value of tokens. In addition to the functions of KCS deducting handling fees and obtaining VIP qualifications, expanding its application in travel, lending, games, social networking and other scenarios is far more meaningful than planning some destruction events."
Coincidentally, retail investor Xiao Wu told BlockBeats that "some project parties have begun to imitate the destruction of platform coins and engage in speculation." For these currencies, ordinary investors must increase their risk awareness, abandon the pseudo-logic of value return, and look at the market rationally.
Of course, in the final analysis, the destruction routine is nothing more than a normal means of capital operation. But everyone needs to understand that what drives the rise of this type of platform currency is not the contraction of the supply side, but the disturbance of short-term speculative demand. (BlockBeats Note: High dividends and transfers in the stock market are also a classic capital operation method. Although the destruction of platform currency team shares of some platforms is different in procedures and there is no splitting and distribution of tokens, the core of their concept speculation is the same)
At the same time, the destruction of platform coins cannot be generalized. For those platforms with good development prospects and scale, a large number of active users and traffic, platform coins have a good long-term demand level. The operation of destroying platform coins is at least better than nothing, which controls supply and stimulates short-term demand.
In summary, in investment, especially when facing highly speculative targets such as digital assets, it is meaningless to talk about supply without considering demand. We often mistake the sharp price fluctuations caused by short-term speculative demand disturbances as the illusion of a sudden increase in the value of the underlying assets.
Similar logic can even be extended to the hype surrounding this year’s halving of currency.
Halving and Production Reduction
Halving usually refers to the phenomenon of reducing block rewards for currencies that use PoW as the consensus algorithm. In layman's terms, it means that the supply speed is slowing down. The most talked about is naturally the third block reward halving of Bitcoin, which is expected to take place in May this year. As a result, the market has also brewed a strong bullish sentiment.
In fact, the issue of halving needs to be looked at separately for Bitcoin and other currencies.
At present, Bitcoin has a large amount of trading and speculation demand, a small amount of storage demand and a tiny amount of usage demand, so Bitcoin can be regarded as an asset with real demand. Therefore, the halving of Bitcoin's block reward has economic significance, that is, under the condition that the overall demand level remains unchanged for a long time, the halving of the supply speed will have a positive impact on the price. This is established.
Note that there is a prerequisite here, "the overall demand level remains unchanged." Obviously, from a 10-30 year perspective, this condition cannot always hold true. You cannot expect everyone in the world to buy Bitcoin, and expect them to buy more, use more, and save more each time. There must be an upper limit to the demographic dividend. As for which halving will hit this upper limit, it is not the scope of this article.
On the other hand, many promoters of “other coins” use the slogan of “halving and production reduction” to promote wild coins with no community and no users. In fact, investors should understand that these wild coins without real content have no actual use demand, storage demand or trading demand, and they only have speculative demand.
Similar to the logic of the platform currency destruction this time, the so-called supply-side contraction cannot directly bring a positive impact on the price. The reason why we can see the price changes of these currencies is actually the result of the main funds operating behind the scenes and some retail investors following suit, that is, the speculative demand has exploded in the short term.
But what everyone needs to understand is that after the tide recedes, hot money dissipates, and speculative demand disappears, the contraction in supply will not bring about an increase in actual demand, nor will it bring any substantial help to the weak supply and demand relationship.
Where they came from and where they will go back to is the best destination for these currencies.
Of course, the “other currencies” referred to in this article are not all halved currencies except Bitcoin, but those currencies that have no real users and usage demand. As for how to define this standard, it is left to the readers themselves.
The Red and Black of Platform Coins
Having said so much logic, BlockBeats is by no means trying to predict the market’s decline, but just wants to help retail investors look at the market more rationally and soberly. As for platform coins, after all, they are one of the few tokens in digital assets that are supported by real cash flow, so what are its advantages and disadvantages in terms of investment logic?
Let’s talk about the advantages first. Relatively speaking, platform coins anchor the dividends of the development of digital asset trading platforms, making it difficult for investors to miss out on the bull market, and they can also grow together with excellent trading platforms. For example, this rule can be summarized from the three major platform coins BNB, OKB, and HT.
However, it is still unknown whether these platform coins can outperform BTC in the long run. After all, the current statistical data cycle is too short and has little reference value. Except for the platform coins that received a lot of bull market benefits in 2017 due to their early issuance time, in fact, the exchange rate of platform coins against Bitcoin of large trading platforms is mostly stable, or slightly increased/decreased. Although it is relatively safe, there will be no explosive gains.
In a mature capital market like the U.S. stock market, we found and compared the investment returns of Interactive Brokers and the Nasdaq Index over the past nine years, and compared the earnings relationship between U.S. brokerage stocks and the broader market. The data showed that Interactive Brokers did not outperform the Nasdaq.
If we carefully read Interactive Brokers' financial reports for 2017-2018, we will find that profits did not increase during this period, but the stock price rose sharply. The reason is simply the overall bullish sentiment in the market.
This is consistent with the observations of platform coins in cryptocurrencies. We tend to overestimate the short-term effect of a certain repurchase and destruction amount on the price of the coin, and underestimate the impact of the overall market trend on the price of the platform coin.
At the same time, we can also conclude that the return on investing in the platform currency of large platforms is around beta return. It will not oversell too much in a bear market, nor will it be all-out in a bull market. Overall, it will return to the market mean, but it will be relatively stable.
So, is investing in platform coins really safe? In the view of BlockBeats, the platform may have the following major risks.
The first is a covert operation. No one except the trading platform itself can accurately know how much revenue the platform has. In other words, in the absence of supervision, the number of tokens destroyed by the trading platform is highly manipulable. Of course, we can still calculate the destruction amount from the blockchain address of the destroyed platform currency and infer the profit to make a rough assessment.
The second is a logical paradox. Platform coins cannot directly pay cash dividends like securities. This is not only a question of whether or not to operate publicly, but more importantly, it will bring regulatory troubles. The benefits of repurchase and destruction and direct dividends are not exactly the same.
In this highly uncertain industry, direct dividends are obviously more direct than retrospective destruction. Only in the later stage, when the repurchase and destruction reaches a certain scale, can it generate income value exceeding direct dividends. The detailed argument here will not be elaborated.
On the other hand, many trading platform companies have chosen to go public through backdoor listings, and how to balance the relationship between stocks and platform coins is also a big question. Moreover, many trading platform ecosystems have more than one platform coin, so it is questionable whether the overall rights and interests of the trading platform will be diluted again.
Most importantly, the ultimate risk of exchange tokens is regulatory black swans. If certain regulatory policies are implemented, will the existence of "exchange tokens" as an asset form really be allowed?
We can almost assert that mainstream digital assets such as Bitcoin and Ethereum will not face much regulatory pressure. Their lower limit is to maintain the status quo, and their upper limit can be traded openly on fully compliant platforms, because such currencies have no "company" or "security" attributes at all.
This obviously does not apply to platform coins.
Combined with the asset characteristics of platform coins mentioned above, we can even say that investing in platform coins is somewhat like the seller strategy of options, with a high probability of stability and a low probability of black swans. Due to the high probability of stability, platform coins of large trading platforms are suitable for asset allocation in investment portfolios to hedge the risks of the underlying assets and smooth the net value; due to the low probability of black swans, platform coins are not suitable for full-position intervention, because regulatory policies are always unknown.
"Smarter, Faster or Cheat." If you don't have any of these three qualities, you need to think carefully about how you make money in the market. Most people rely on "trends." And any "trend" has different levels, and the thinking behind it also has different levels of depth.
Understanding the real logic behind the rise and fall of assets may not make you money, but it can at least help you lose less.
*Investment is risky, so be cautious when entering the market. In this article, BlockBeats only discusses and analyzes digital assets, their token economic models, and investment principles, and does not represent any investment advice, especially for small cryptocurrency trading platforms that run away. Investors need to control risks on their own and look at the market rationally. | 
