Binance is among the largest and most powerful cryptocurrency exchanges in the world and their coin has a market cap of over $1.5B USD. They have the most legitimate volume and many consider Binance to be the most reputable crypto-crypto exchange.
Binance transacts over $1B a day and is able to process over 1.5 million orders per second. The exchange profited over $200M in just its second quarter of operations, and expects to exceed $1B in profit in 2018. In the second quarter of 2018 it was announced that Binance has more users than the population of Hong Kong, and that the company was more profitable in Q2 than Deutsche Bank – which is one of Europe’s largest banks, established over 148 years ago.
Binance didn’t even exist 14 months ago, and in that time span the company has moved its headquarters from Shangai, to Taiwan, and now to Malta, seeking favourable regulations to support their growth in uncertain regulatory climate of the cryptocurrency industry. The company has also scaled to a team of 260 employees.
The company’s native coin, Binance Coin (BNB), has also been one of the best performing coins since its inception in July 2017.
The BNB Coin from Binance
Today, the ERC20 token ranks in the top 5 out of all cryptocurrencies in its performance against the US dollar in the last fiscal year – it is up approximately 12,000% since its ICO. The coin is currently worth over $13 USD and the ICO price was just over 1 cent per token; raising $15M USD in an ICO environment where this sum was considered quite modest.
Recent BNB valuations done by credible analysts have valued the coin at 1.5X its current price level, and industry leaders concur that the vast majority of crypto users value speed and reliability over decentralization; giving more market dominance to centralized exchanges.
The token can be used to pay fees on Binance – these fees include: exchange, withdrawal and listing. There is a 50% discount on transaction fees in the first year and the discount halves each fiscal year until there is no discount in year 5. There have also been additional incentives added since the whitepaper, including increased referral rewards for Binancians who hold at least 500 units of BNB.
Binance has also committed to using 20% of quarterly profits to destroy BNB until 50% of the total supply is destroyed; leaving 100 million BNB in circulation. BNB isn’t the only coin that benefits from being traded on Binance – newly listed coins typically trade at what analysts call a “Binance Premium” (liquidity premium) where initial listings, and even rumoured listings, have caused 25%+ spikes in asset prices.
This premium has promoted analysts to speculate that a Binance listing can cost a project team up to $5M for a listing, as projects are expected to pay the costs associated with listing as well as the regulatory requirements. These regulatory requirements include legal statements from lawyers in several jurisdictions stating that the coin is not a security, because Binance is not regulated to trade securities.
Binance recently announced in their quarterly recap that they don’t explicitly as for high listing fees, but projects propose what they are comfortable paying to Binance, which may include no money at all. They added that “free market dynamics takes care of the rest”.
The Inescapable Influence of CZ
Binance also has an extremely strong leadership group. Their CEO, Changpeng Zhao (better known as “CZ”), has been building trading systems since the early 2000’s – he started his career working at Bloomberg.
Recent announcements of new Binance business streams, such as a Binance technology incubator called Binance Labs, a Binance decentralized exchange, and a crypto-fiat exchange called Binance Uganda have opened up the possibilities additional token use cases. CZ has hinted that the company will be adding additional utility to the token, but nothing has been finalized.
CZ topped off the hype surrounding Binance coin when he remarked in his April LinkedIn post recapping Binance’s Q3 by noting that many people are using BNB as a “stablecoin” during the bear market. The coin’s price has held up much better than some assets since January, including bitcoin, but investing a significant amount of your portfolio in Binance Coin is much riskier than you think.
Using BNB as a stablecoin instead of well-known stablecoins such as Tether (USDT) is akin to keeping your money in $APPL stocks versus the US dollar. I’d argue that BNB is a riskier investment right now than $APPL, but that is neither here nor there.
Keep in mind that risk is not necessarily a bad thing – the theory is that more risk should mean a higher return, but more risk also implies there’s a larger chance that the asset could go down…
Binance Risk Assessment
Binance Coin is riskier than most investors realize for 5 main reasons:
The BNB whitepaper indicates that fees rewards will halve each fiscal year. The fiscal year for BNB ended on July 15th, and fee rewards are still at 50% rather than 25%, but Binance has followed the whitepaper to a tee in regard to their quarterly coin burns, which is a strong indicator that fees rewards should suddenly halve in the upcoming weeks.
I believe this will come as a shock to more casual traders and it’s possible that many have priced in 50% fee rewards in perpetuity to their BNB valuations. When Binance announces that fee rewards will be reduced there’s a chance that these holders will sell their surplus supply.
Collateral damage of decaying rewards may also also negatively impact exchange volume. Traders, and especially algorithmic traders, will need to identify larger spreads and upsides to their trades to justify paying the higher fees – even if they are marginal.
Exchange risk is diversifiable risk just as token risk is diversifiable. A simple example is that a major Binance hack will clearly negatively impact the price of BNB, but this won’t necessarily have the same impact on Bancor (BNT).
Up until early July I would have been confident in saying that Binance was the least susceptible exchange to security breaches due to safeguards they’ve put in place, but after the peculiar Syscoin (SYS) events I am second guessing myself.
Binance has created a moat versus incumbent competitors, in a bear market where investments in their trading system has made them the fastest, most reliable exchange. They have also developed a devoted community with their trading competitions and listing competitions, while listing popular coins and giving crypto enthusiasts an easy interface to purchase their favourite currencies.
Despite these successes, Binance does not have the best trading infrastructure in the world. There are an abundance of traditional stock exchanges, such as the NASDAQ, that have superior systems and more recognizable brands that are seeing Binance post record-setting profits for a start-up. There is little reason to believe these large players won’t enter the industry when regulatory issues are more clear, and they’ll have immediate competitive advantages over Binance, while likely having the backing of more regulatory entities.
Not only have the promises of new utility for BNB not been confirmed, they are also not ironclad. There is no guarantee that these additional business streams will provide greater demand for the token. A Binance decentralized exchange (where BNB is used to subsidize fees) may bring more demand to the Binance ecosystem because it will cater to customers who care less about speed and reliability, and more about true decentralization. That doesn’t mean the demand for BNB will be substantial.
Top decentralized exchanges are lucky to hit 1000 BTC per day in trading volume, whereas Binance will hit 200,000 BTC on a high-volume trading day. The increase in demand will be marginal at best unless the token has additional utility on the decentralized exchange.
This is a case of having “all your eggs in one basket”. In the case of a black swan event, such as Binance itself being shut down by an authority, BNB loses its utility and becomes useless. This risk of how censorship will impact an asset’s value should be evaluated when investing in any cryptocurrency because of the regulatory uncertainty in the industry. In the case of Binance, the risk may be no higher than any other exchange, but the impact on the value of BNB would be immense.
What Is The Case For Binance?
It’s also important to note that I believe BNB has an excellent use case given how strong the Binance exchange is, and it has the strongest fundamentals among exchange tokens. It’s important to identify that the market sentiment for BNB has reached a point where it may be overvaluing the token, and investors could be underestimating the risk that BNB carries.
As an active trader on Binance I know that CZ prefers to “undersell and over deliver”, so it’s within the realm of possibility that future utility for the token is increased with additional business streams, and that the fee savings structure of the BNB token is held at 50% for the foreseeable future. It was rumoured that Binance was contemplating keeping the 50% fee reward moving, but only time will tell.
I continue to admire CZ’s lighthearted transparency in the industry and I believe he sets an example that all leadership groups should follow.
Disclaimer: The author is invested in BNB, which is mentioned in this article.