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(Pyros make excellent spy hunters just from squirting a little fire on any teammate they pass by. The DoT effect from fire makes it hard for a spy to cloak right away.)
It's a spy knife.
You disguise into whoever you backstab instantly, there's no death sound and no corpse, but you can't disguise normally.
So it's pretty much an assassination knife.
I knew what you meant and it doesn't make sense because flame is essentially a plasma so wouldn't freeze solid - basically I was agreeing with your disbelief about it. And Frozen Smoke was what it made me think of.
It's Iceman that froze it, but Storm was teaching the class