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Well, yes. They can delete everything on your Kindle.
You will then have to reload everything.
What alternative do you suggest? That if you forget your password the Kindle is forever trashed?
If someone malicious gets ahold of your Kindle, you are not likely to get it back. So they have a stolen device which will get blacklisted.
If you forget the password, you can start anew.
If a "friend" who is playing a joke on you wipes your Kindle, you start anew, and stop being his friend. This is the only situation where, practically speaking, the reset code is a bad thing.
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