In this demonstration, the liquid used is a 50/50 mixture of isopropyl alcohol and water. Methanol or ethanol can be substituted for the isopropyl alcohol. Some salt in the solution will help to make the flame more visible. Other combustible materials, such as paper, can also be used in place of the 20$ bill. A dollar bill provided by someone in the audience is especially effective. Note carefully the purity of the alcohol before mixing. Rubbing alcohol as sold in drug stores is often 30% or more water. One could repeat the demonstration with varying mixtures of alcohol and water. Too much water will prevent the alcohol from burning, and too little water will allow the cloth or paper to char.
In a variation of the demonstration, a dry cotton cloth is wrapped tightly around a coin, and a lighted cigarette is touched to the cloth. The coin absorbs the heat and keeps the temperature below the point where the cloth burns.
DISCUSSION
This demonstration illustrates the variation in the temperature required to support combustion in different substances. The alcohol burns at a temperature below the kindling temperature of the cotton. In addition, the heating and vaporization of the water removes heat and prevents the cloth from burning.
HAZARDS
Although the flame is relatively cool, it is capable of producing severe burns. Hold the handkerchief with a pair of very long tongs (30 cm or more) while it is ignited. Plan ahead to have a way to extinguish it before the water is completely vaporized or if it inadvertently drops to the floor while burning. Isopropyl alcohol can damage the eyes severely.

































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Check the instructable on creating a knife out of a penny, it explains this in greater detail.
unites or cements together, or does any other thing to any bank bill,
draft, note, or other evidence of debt issued by any national banking
association, or Federal Reserve bank, or the Federal Reserve System,
with intent to render such bank bill, draft, note, or other evidence
of debt unfit to be reissued, shall be fined under this title or
imprisoned not more than six months, or both
So if you accidentally burn the dollar, you aren't doing anything illegal