Buyback-and-burn: How It Works and Why It’s Effective
Buyback-and-burn programs support long term price stability and value growth; that’s why INVAO has included it into the IVO token’s smart contract.
Last year, Apple announced the largest share repurchase program in history. The company said it would buy back $100 billion in stock — but didn’t specify any dates.
Companies typically buy back stock when they have extra cash that they would not reinvest otherwise. Share repurchases are great news for investors because they lift stock prices by limiting the supply of shares available for sale.
“Buyback-and-burn” may be a terminology specific to digital assets, but the idea is the same as with traditional share repurchase programs: The issuer buys back previously issued tokens on the secondary market, to reduce supply and thus increase market prices.
One could also draw a comparison with dividend payouts, another way for companies to shift value to investors. The difference being that dividends come in the form of a cash-payout, while stock repurchases and token buyback-and-burn schemes increase the market value of the asset. For most retail investors, buyback-and-burn will have more favorable tax implications.
Supporting long term price stability and value growth
Price volatility in digital markets tends to be higher than in traditional markets, at least in the current market environment. Investor confidence is lower, as the digital economy is still in its infancy. Therefore, to attract investors, issuers need to be able to formulate a clear, functional, stable and profitable value proposition that works within the digital ecosystem.
The issuer benefits from buyback-and-burn in four ways: Firstly, buyback-and-burn programs support the growth and price stability of the token value once listed for secondary trading. Secondly, the token will be more attractive to investors. Thirdly, buyback-and-burn results in increased liquidity as the secondary market demand for trading the asset on exchanges will be higher. Increased liquidity in turn results in lower price volatility. Fourth, buyback-and-burn incentivizes long-term growth investors to HODL the token, which further adds to the price stability of the asset.
Binance’s buyback-and-burn program has proven effective
The BNB token of the exchange Binance includes a buyback-and-burn program. As outlined in the company’s whitepaper, Binance uses 20% of its profits to buyback-and-burn BNB tokens every quarter, reducing the overall circulating BNB token supply.
This process is going to continue until Binance has burned 50% of all BNB tokens. The below graph shows how the BNB token’s value has developed over the last six months. It has gradually increased since December 2018.
In comparison, most major digital currencies have been in decline or moving sideways throughout the same period.
Buyback-and-burn supports value growth of the IVO token
INVAO Group will buy back IVO tokens from the open market annually and burn those purchased tokens via a smart contract. With each buyback-and-burn, the net asset value of INVAO’s Blockchain Asset Pool will be divided among a shrinking supply of tokens in circulation. As a result, the price of the IVO token should continuously grow over time.
INVAO will spend 20% of annual operating profits — calculated as trading profit less trading and operating costs and tax — to buyback-and-burn tokens. The token’s smart contract includes a commitment to buyback-and-burn 50% of the total amount of tokens issued, which is expected to have positive short-term and long-term effects on the IVO token’s price appreciation.
Likely to become a de-facto standard for digital assets
A significant difference between stock buybacks, dividend payments, and buyback-and-burn is that the latter is guaranteed and automatically executed. When buying a traditional stock, investors don’t know if the company will at one point in the future buy back stocks or pay dividends. That’s in the hands of corporate decision makers. Buyback-and-burn, however, will be executed via pre-defined encoded smart contracts. The issuer has no choice but to follow through on made promises.
Therefore, the buyback-and-burn mechanism is likely to become a de-facto standard for digital markets in the long term. Companies can’t tamper with the rules and investors can ask for proof that the issuer has burned the tokens. That eliminates uncertainty on the side of the investor and supports long-term value growth and price stability.
