BBOD Rating [10/10/2018]
BUY: A low-risk buying opportunity
|Transaction Start Date||25/07/2017|
|Protocol Type||Cryptocurrency Exchange|
|Where To Buy||Binance, HitBTC|
Binance Exchange Overview
Binance began trading as a little known Chinese cryptocurrency exchange in July 2017, during a boom time for the marketplace as a whole. Utilising the fortunate timing of their project and an aggressive marketing strategy the company became the highest traded spot exchange by daily volume a mere six months after inception. This rise to fame was unprecedented and something competitors such as Bittrex and Poloniex certainly did not anticipate. Binance achieved such success by significantly beating competitors on tradings fees with 0.10% per trade as opposed to 0.25%. Additionally, they employed an extremely liberal coin listing policy, growing their community at an exponential rate by attracting traders from a wide pool of already well-established cryptocurrency projects. Today, the platform lists 280 active trading pairs with an average of 1 billion trading volume daily and over 9 million active users.
Binance Coin [BNB] Overview
In order to raise money for the platform, Binance launched their ICO for Binance Token [BNB] on July 2nd. Due to the substantial bull market of the time and their solid project, Binance sold the entirety of their 100 million BNB tokens within several minutes of availability. The token sold for an average price of 0.11 USD, equating to approximately 11 million USD total funds raised during their ICO. BNB is an ERC20 token based on the Ethereum blockchain with a max supply of 200 million, after which no more coins will be created. Although BNB is now widely acknowledged as a utility token for use on the platform, the value of the token also corresponds to the equivalent of a traditional stock, with holders owning a proportional share in Binance that will likely appreciate proportionally with the growth of the exchange. This is a particularly rare phenomenon in the cryptocurrency space, where the majority of coins do not have such a substantial functioning product supporting them.
The Utility of Binance Coin [BNB]
Currently, the main use case of BNB token stems from its ability to be used to decrease trading fees on the Binance Platform. Users can choose to pay for fees using BNB instead of utilising the cryptocurrency they are trading. If one chooses to do so they can expect 50% trading fees in their first year of membership, which decreases by half every year of subscription, until year five, where a discount no longer applies. In essence, BNB becomes the fuel for the Binance ecosystem, providing real-world utility to the token, unlike many other cryptocurrency projects whose promise of utility stems from the future success of yet to be released product. The reduction in fees is hugely significant to frequent traders as the platform itself currently undercuts any other exchange on the market without even employing the token discount, at 0.1% per trade. Combine this with the lowered fees when BNB is implemented to trade with and the exchange substantially undercuts its competitors on trading fees. For example Huobi and Bitfinex both employ trading fees of 0.2%. The oversight of Binance competitors higher fees is likely what drew many to the platform from in the first place.
In order to counteract the decreasing value of the BNB fee discount over the period of five years, Binance has employed a quarterly coin burn for their tokens. Essentially, Binance will buy back BNB tokens from the market and send them to a public address whose private keys are unobtainable, effectively destroying the tokens. This decreases the supply of BNB in circulation with demand remaining the same, usually resulting in an increase in price as the token becomes more scarce. This ingenious tactic has gained much publicity and succeeded in its aim thus far, with prices increasing substantially before coin burns that have occurred in the past. Binance aims to do this every financial quarter with 20% of their profits. So far they have met their promise, with 986,000 BNB burned in their first quarter, 1,821,586 BNB in the second and 2,220,314 BNB in the third, approximately 30 million USD at the time. The process will continue until half of their total supply remains, 100 million BNB. Such a mechanism has captured the attention of investors who will likely hold onto BNB for speculation purposes once users fees no longer decrease by utilising the token for trading fees. With increased visibility into the valuation of the BNB due to its direct correlation to the success of the exchange, no doubt prices will increase if the business continues on its current trajectory.
Continuing their effort to provide BNB with meaningful value, the Binance Launchpad program allows individuals to invest in certain cryptocurrencies that are in the process of being listed on the platform using BNB. This furthers the tokens use case and creates a seamless marketplace between available ICOs and the exchange itself. Additional add-ons such as the Launchpad program increase the utility of the token and hence its demand, potentially leading to an increase in price. Continuing the process of frequently improving the usability of BNB will likely be key to the tokens success going forward. Such efforts thus far include Monaco adding BNB to their cryptocurrency Visa Card/App and the ability to buy virtual gifts on Uplive using the token.
Looking to the future, Binance plan to build a decentralised cryptocurrency exchange (DEX) which will utilise the BNB token as the primary base asset and gas to be spent. Binance has coined this project Binance Chain, although it is still in the stages of development, admittedly aiming to outsource the underlying technology by providing a 1 million USD bounty and a job at Binance to an individual with a successful proposal. Although, if Binance Chain is as successful as Binance itself, BNB will gain significant value from a substantial increase in demand for the token for investors to utilise on the DEX platform. Moreover, they would mitigate regulatory risks of their current centralised exchange, as decentralised exchanges are inherently impossible to shut down. Despite this, the current DEX environment has largely suffered from a lack of usability, functionality and liquidity. Thus, pulling off a decentralised exchange successfully at this moment in time would be no easy feat.
Organic Growth Through Reputation: Binance’s significant success in the cryptocurrency spot exchange market thus far has gained them substantial brand recognition in the marketplace. Couple this success with an ever-expanding user base and this could translate into sustainable long-term growth for the BNB token.
Continual Drive for Innovation: Since their inception, Binance has made continual strides to expand their product offering and overall ecosystem. For example, improving the functionality of the exchange itself, introducing the coin burn function and offering market participants the opportunity to invest in cryptocurrencies utilising BNB in their Launchpad program. Further efforts to improve the Binance ecosystem will not go unnoticed and will certainly affect the price of BNB.
Sustainable Growth During a Bearish Market: Although the fortunate timing of the implementation of the exchange can be seen as luck by many, Binance have not failed to increase their market dominance this year in a declining market (approx. -70% YTD). The consistency of trading volume, hovering around 1 Billion USD per day suggests that when the market decides to turn bullish, the number of individuals who utilise the platform and its token will increase.
BNB Risk Factors
Regulatory Environment: Since the success of BNB is entirely hinged on the success of the Binance exchange, the centralisation of the exchange may become an issue if regulators choose to crack down on cryptocurrency exchanges in general and make an example of them as a key figure in the industry. The platform has shown no interest in complying with regulators and so the way forward appears to be creating their decentralised exchange Binance Chain, which they are far from realising.
Market Saturation: Now that the market for exchanges is becoming incredibly saturated, firms with capital are employing aggressive strategies such as feeless spot exchanges, eradicating the need for BNB’s fee reduction utility. Despite this, none have diversified their market as much as Binance thus far and it will be hard to keep pace if the company pays attention.
Centralised Ownership: Ultimately Binance is a centralised exchange and thus decisions on what utility BNB should hold are made by management officials. This removes the right for token holders to collectively decide the fate of their token going forward. Although, so far, one would be stretched to challenge the decisions for BNB’s utility, as the strategies implemented seem to have largely paid off.
The initial incentive to buy BNB tokens was to gain discounted trading fees on the Binance platform, as doing so would substantially out-compete other spot exchanges on fees. Although this function is slowly being phased out over the period of five years, over time Binance has presented multiple other utilities for their token such as the ability to invest in ICOs to be launched on the Binance platform using BNB and the future hopes of utilising the token on Binance Chain, their decentralised exchange in the early stages of development. Couple this with token burning to slowly decrease the supply of BNB and Binance seem to know how to create sustainable long-term value for their BNB token. Hence, looking forward, as long as Binance can keep pace with the ever-evolving regulatory environment, BNB appears to have a bright future ahead of itself.
BBOD Rating Standard
BUY: A low-risk buying opportunity
ACCUMULATE: An opportunity to buy a medium risk cryptocurrency at a low price
SPEC BUY: A speculative opportunity for investors with a higher risk tolerance
HOLD: Maintain current levels of position until further research is published
SELL: Investment is associated with the potential of losing capital
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