Binance — problems in the future?
In this article, I’ll look at Binance, probably the biggest success in Crypto for 2018, and honestly big deal in any industry for 2018. The exchange, started in 2017, is now the biggest fee-charging exchange by volume, overtaking Kraken, Coinbase, Bitfinex — the lot.
lThe only exchange that is bigger is the BitMex exchange, which charges no fees and offers ludicrous margin (100x!) for the most volatile currency in the world. It really shouldn’t do that.
I recall on one telegram chat some kind soul said BitMex was fine, because — and I swear this is true — “caveat trador”.
Oh! Oh dear.
Didn’t we do a joke about conceit before?
Yes, but I’m not sure its great for me to be talking to myself about jokes I made to myself in previous excursions.
Yeh, thoughts can be tricky.
Ok, well, now we’re clear who we are, shall I begin?
Go right ahead.
So, Binance. In brief, founded in 2017 by an IT guy. From Crunchbase we can see they raised 10 million USD in Sept 2017 (note this is self-reported data), and they had a 15 million USD ICO round at some time in early July 2017 too.
As we’ll see, they’re “doing an Uber”, which is focusing on rapid growth at the cost of regulations. While many articles site their “clever” BNB token for their growth, this blogger thinks it might have more to do with the fact they don’t do any AML / KYC (anti money laundering/know your customer) checks on any customer, so long as that customer withdraws no more than 2 Bitcoin a day. That’s anywhere from ~45K USD to ~6K USD this year, depending on the day. And of course, who is to say how many accounts someone might have?
One imagines it’s easy to make money if one caters to drug lords, cartels, terrorists and other lovable scamps.
Well, ignoring regulations is apparently fine and dandy, but the bear market is really hitting the “rapid growth” part of that plan. This bear market & its impact is the focus of this piece.
Binance opened doors on July 14th, 2017 (although English services apparently only began in ~August), and began a pretty interesting journey. Their CEO CZ regularly gives updates on how they’re going, and the numbers are pretty rocket. Of course, this is all self-reported data.
So the ICO?
While I go into that in more detail here — for those of you who are wondering what an ICO is and how this particular one works — the only thing we really care about is their claim to “burn” 20% of profits worth of coin each quarter.
As in most things in crypto, “burn” doesn’t mean what you think it means — namely, it doesn’t cost them a cent — but it does give us a self-reported idea of quarterly profits.
Oh! So how does burning tokens/coins work?
First, it’s all a little deceptive. Their whitepaper claims they buyback and then burn the coins. (Burning just means “sending coins to some blockchain address that nobody owns, so nobody can access ever again”). In practice, literally buying back the coins would be extremely price positive, but of course they don’t do that.
Aw!
Yeh, all they do is take tokens they already own and trot them off to some address that — supposedly, let’s believe them — nobody owns. That’s not really what “buyback” means, but rock on.
Wait, how do they own coins if they sold them at ICO?
Half. They sold half — 100 million — coins at ICO, and kept half. The coins have no purpose but to be used to pay transaction fees on their exchange (although you don’t need them to pay — but you do get a discount on the fee if you do). So they get coins from people using their exchange, because those people pay them their BNB tokens when they pay their fees. Then… the Binance team go and sell those same tokens back to users on their exchange.
So they get paid fees in tokens they issued, they sell those same tokens back to people on their own exchange, and every quarter they send some of those tokens somewhere else to destroy them?
Basically, yes.
Does that mean the token price increases?
I look at that stuff in this article. No reason for it to though. It’s a little tangential to today’s point, and nobody reads for more than five minutes anymore.
The *only* reason we talk about the coin is because Binance assure us that they “burn” 20% of their profits worth of the Binance coin each quarter.
Let’s shift gears to Binance itself.
Yay! Vrrrrm! Vrrrrrrrrrrrrrrrrrmmmm!
Ok, let’s we assume that their statements about their profits — Q1, Q2, Q3, Q4, Q5 — are true (and remember, these are unaudited). And if we assume this unaudited, self-reported Bloomberg statement is correct, then revenue in their first 6 months was 300 million USD (!!!).
From this we can work out their costs.
Right, but remember they lost 20% of their profits burning the coins
No, they don’t — they just destroy that amount of coins from what they already own. As CEO CZ says, that increases the value of the remaining coins, of which, incidentally, they hold the majority. They don’t spend any money “burning” coins, they just send a certain amount away to be lost. Which… they claim makes their holdings worth more.
Oh. Ok, so what’s this profit/costs stuff look like for them?
Well, I don’t have a lot to go on for costs — Bloomberg claims first half revenue was around 300 million USD, and from Binance’s posts, burn for the first half — Q1 and Q2, above — were (1.3 million + 37.8 million) * 5.
(Recall they burn 20% of profits, so we multiply by 5).
That means they had a profit of 195.5 million, on revenue of 300 million. Not too bad!
So! costs are 300–195.5 = 104.5 million USD a half year, or about 34% of revenue.
I feel you’re building to something here…
Well, Q5 profits were down a fair bit — to (17 million * 5) = 85 million USD. That’s still a lot — a hell of a lot — but the price of Bitcoin was around 6,500 USD. And right now, of course, it isn’t.
Uh… ?
You’re reading a Bitcoin blog! How do you not know!
I love spoons. Specifically the ones that feed me.
Sigh. It’s ~3,200 USD.
OH!
Oh indeed. Also, they make more money when a lot of people are g̶a̶m̶b̶l̶i̶n̶g̶ uh s̶p̶e̶c̶u̶l̶a̶t̶i̶n̶g̶ no trading on their platform. What do their trade volumes look like, comparing October to now?
So they’ve lost about 50% volume?
Looks like it. Also, the value of currencies from October to now has dropped ~50%.
Why are we talking about the value of currencies exactly? Isn’t their revenue in USD?
No, actually. Binance only trade currency pairs, they have no cash on their exchange. So they take a cut of all trades — but that cut is in some crypto currency. To pay for hardware, electricity and salaries, they then have to take that crypto currency to a different exchange and convert it to cash. How much of this do they do? I’d guess given CEO CZ’s bullish Bitcoin outlook that they don’t convert all their currency. This all means
- As currency prices drop, so do their revenues
- They probably stockpiled a bunch of crypto currency — all of which has dropped by at least half and up to 90%
So what, their current revenues are down how much?
Oh, they’re down 50% in measurements of their daily USD trade volume— implying they are at 50% revenue from October. This drop in volume matching the drop in crypto prices implies that the same amount of crypto is traded, just at lower values. I find it hard to believe, though— you’d assume some people would have stopped trading, but let’s take all this at face value.
What this implies is that computing costs would be the same, as the amount of coins traded remains consistent. Ergo, their computing costs haven’t dropped.
Other cost changes?
Tricky. We also know they’ve been hiring like crazy people, from 78 people in 2017 to ~589 people (on LinkedIn, anyway).
That means that their costs from our earlier 6 month analysis have definitely risen considerably. They’re running seed programs, investing in Africa, funding academies, increasing their headcount.
Well, can we work out revenue in October?
Sort of. They have a 0.15% fee on all trades (whether you buy or sell, maker or taker, you get charged 0.075%, so it’s 0.075 * 2 = 0.15%), with a daily October average of 1.1 billion USD in trades.
Does that include this BNB token discount?
Yes. The token-reduced fee is 0.15% (they have a reduced fee for frequent traders, which will drop revenue a bit, but I’m keeping things simple).
Over 1 day, that is 1,100 million * 0.15% = 1.65 million/day
Over 90 days, that is 1.5 million * 90 = 148 million.
Oh, that’s a lot of revenue!
Well, there is more. They also charge for listing coins! They earn anywhere from 1 to 3 million a coin they list. And while their CEO denied this, nobody really believes him. Anyway, now they’re outright saying that they will give all future revenue from coin listings to charity (wait so… what was the CEO denying?)
How many coin listings were there?
Well, there were a lot earlier in 2018. Now? Now I don’t think it matters so much (because nobody wants to buy anymore). But they listed about 84 coins this year — 74 before the October 8 announcement that they were donating proceeds to charity. That’s about 25 every three months, or revenue of anywhere from 25 million to 75 million — let’s conservatively say 25 million USD per quarter.
So148 + 25 is… carry the one…
It’s ~175 million, and they claim 85 million profit. That corresponds with our analysis on the first two quarters (costs of ~100 million per 6 months), if you accept that they’ve expanded into all sorts of things and grown headcount, so costs have grown from 50 million a quarter to ~90 million.
Ok, seems fair.
Sometimes while writing I forget you’re me. Let’s hope our readers are happy with this too! So, revenue was ~175 million. Now, if this market continues? They already lost their 25 million from new ICO placements, so that’s 150 million. And now they’re down 50% volume, so we’re at Q6 revenue of ~ 75 million.
And that means they’ll be at a loss —a quarterly loss of about 75–90 = 15 million USD.
Oh. So if the bear market extends more than a few quarters, they’re going to have an unbearable time?
Yes. They’ll be losing on two fronts —much of their cash on hand is probably crypto currency. Mining companies seem to keep 50% cash, 50% crypto, so they’ve at best lost about 25% of whatever total liquid assets they had right now.
It gets worse though.
Oooooh! How?
Well, that analysis I did — for October 2018, or Q5 — that included some periods of much higher prices — and so, much higher USD volumes. That would mean a lot more revenue for Binance, which would imply our costs calculation are off by a fair bit.
So what’s the prognosis doctor? How bad could it be?
It could be as bad as revising costs to more than 120 million a quarter, (based on higher ICO listing fees, and higher trade volumes in Q5) meaning if this bear market continues, they’re bleeding more than 50 million USD a quarter.
Can it get worse?
Well, actually, yes. Because they’re under no audit, and it doesn’t cost them anything to actually burn the BNB coins, we have no idea what their profits actually were in Q5. It could be anything! They could be barely scraping by, or making billions a week.
In fact, they can even come out and say for Q6 that they made a profit and then merrily burn another batch of BNB tokens. I suspect, though, that they might have layoffs in Q1/Q2 2019, which would make claiming a profit tricky. We’ll see…
Anything else I should know?
The regulations.
The regulations.
The regulations that all other exchanges make you do — bank account, photo, proof of address.
Binance let anyone trade on their platform. They don’t bother with KYC and AML until you try to pull money out. But if you don’t want to, that’s ok, you just cannot withdraw too much in any given day. Which means that they are potentially in violation of several US laws. It’s easy to grow in crypto-land when you can cater for literally anyone to trade on your platform…
More than anything, this explains their screaming growth. While other exchanges ask you to do pesky AML and KYC things front and center, Binance take a different view.
And that ICO? That’s legit, right?
Well, they ran an ICO, so they’re at risk of SEC fines/shutdown on that too.
But not much worse could be on the horizon, right?
Hah! It’s crypto. The SEC shut down the 1broker exchange in September and people think that Binance might be a target for similar SEC action.
Oh… that’s a fair lot, huh? Are Binance really disregarding regulations that much?
Well, they fled Japan, Hong Kong and China and have offices in fun “non regulated” zones like Malta.
So… in summary?
Binance is an exchange that is not doing AML / KYC for all their customers, is potentially allowing US citizens to use their platform (and is under investigation by NYC for this). This “regulations last, growth first” approach is all well and good, but in the current crypto bear market, they could well be losing ~50 million USD a quarter going forward, which is going to really scuttle their ability to dance around regulations.
They’ve also most likely lost at least 25% of their liquid asset value since October given the current crypto asset prices, which will also hurt them. That means that while it looks like they have ~600 million USD in liquid assets, they have anywhere from 415 million to 200 million USD (depends on how much they kept in crypto, and the price depreciation since then — Bitcoin is down more than 80% from its peak) (they probably kept most of their assets in crypto — banks don’t like working with crypto companies for the “money laundering” problem, and Binance especially have fled regulators. They are more than likely down to 2–300 million worth of crypto right now).
Going forward, it looks like they’re losing more than 15 million a quarter, and getting hounded by US regulators well.
Let’s see what the next few quarters bring. I suspect that there will be layoffs in Q2 next year if this market fails to improve.
