BNB：Market Inflection Point and Davis Double-Click Effect-Comments on Blockchain Events
TOKEN Roll x FENBUSHI DIGITAL
Analyst: Clint Song
Analyst: Zhenyu Wu
Introduction:
The Binance Coin (BNB) is the cryptocurrency of the Binance platform, a leading digital currency exchange. With the arrival of the market turning point, the tokens of exchanges may soon be hit by Davis double-click effect. The driving factor of BNB’s current round of price increase is mainly from valuation recovery, and the subsequent potential price rises depend mainly on profit growth and users’ demand for Binance’s businesses.
Abstract:
Since its inception, BTC has experienced three rounds of price cycles and is currently trading at the bottom of the third cycle. The third round of BTC price cycle is likely to be complete around May 2019, and then a fourth cycle will follow. As the new price cycle of BTC begins, the digital token market may also arrive at the point of inflection, with continuously increasing asset prices and trading volume.
The emergence of the inflection point of the token market will lead to an increase in both profits and the valuation of exchange tokens. After the inflection point in the token market, further increase in trading volume will increase the revenue of the trading platform and the amount of repurchase of the exchange tokens. Meanwhile, with the increasing demand of exchange tokens, optimism under the booming market will push up the valuation of the exchange tokens. Davis double-click effect may occur while the market begins to turn warm. Davis double-click is an investment strategy that means buying potential stocks with stable growth at low valuations, selling them at a higher PE ratio in the booming market, and enjoying the multiple effects of the growth in valuation and performance. For example, “buying brokerage stocks in bull market” is an enhanced version of Davis double-click effect. Since the price reached to this stage, the further improvement of the profit cycle and valuation will bring a higher return, and the upside space after the previous outbreak period depends on the market expectation of its growth.
Exchange token, such as BNB, is a combination of securities company stock and traditional securities exchange stock and it meets the prerequisite ofDavis double-click effect.
BNB has recovered from recession and will perhaps start another brilliant trend based on the competitive advantages of Binance. Binance adopts the focus-on-main-business strategy and as an industry leader in exchange business. The success of Launchpad (Binance’s token launch platform) has attracted a lot of attention and users, leading the industry trend. BNB is Binance’s exchange token of which usages include fee discounts, listing votes and new issuing for Launchpad. Token exchange industry, under global market condition, has a prominent scale effect. Those leading exchanges have higher growth, meanwhile, their exchange tokens have greater upward potential. Based on the ecosystem of Binance, BNB has a large upward space. Currently, the valuation of BNB has been recovered. The extent of Binance’s performance growth and the increase of BNB’s usage demand may determine the follow-up trend of BNB.
Risk Attention: Platform Risk, Sluggish Market
Content
1 Token exchange: Inflection point approaching, Growth in both profit and valuation
1.1 Digital Token market faces a cyclical inflection point
1.2 Both profit and valuation of exchange Token will be increased
2 The logic of the burst of the exchange Tokens: Davis double-click effect
3 BNB: Bad period ends, glory periods approaching
3.1 Binance: Focuses on its main business, being the absolute leader of Token exchanges
3.2 BNB: Core asset of new cycle, the leader of exchange tokensList of Figures
List of Figures
Figure 1: BTC’s three round of price cycle
Figure 2: BTC’s turnover rate increased in the bull market and goes higher recently
Figure 3: Market Share on Trading Volume: Binance is larger than Huobi Pro
Figure 4: Recent uptrend of BNB Prices
Along with the breeze of the early spring, the token market has already got through the coldest winter, and the prices of mainstream crypto assets have begun to bounce back, and the volume of transactions has also risen sharply. While Launchpad is trending, BNB also gets a wave of price-rising, reaching a peak of 149.3% from the beginning of this year to March 7. We believe that the reason of the rising of BNB is mainly from the expectation of the increasing valuation and profit after the inflection point in the token market and the excess return brought by Davis double-click effect.
We believe that the main driving factor of growth in this round is the recovery of valuation, but the subsequent potential of price rise mainly depends on the growth of Binance’s profit and the expansion of related application demand. With the cycle transition, the exchange tokens leader BNB has a long-term opportunity
1 Token exchange: Inflection point approaching, Growth in both profit and valuation
1.1 Digital Token market faces a cyclical inflection point
BTC has experienced three rounds of price cycles since its inception. Through the study of the BTC price cycle, we found three major rules: (1) The BTC price cycle is closely related to its halving cycle, and the bottom price often occurs about one year before the production is halved; (2) BTC price volatility will become smaller when its market value increases , but the total market value and trading volume will rise significantly, which allows BTC to carry more funds; (3) BTC-led innovation keeps on evolving and is gradually approved by mainstream views and the number of investors and users has increased.
The third round of the BTC price cycle is likely to be complete by May 2019, and then the fourth cycle will be forthcoming. In the fourth price raising cycle of BTC, the maximum increase will be smaller, and the trading volume calculated by legal tender will probably exceed the previous high point. With the beginning of the fourth round of BTC price cycle, an inflection point may also take place in the digital token market. Asset prices and trading volume may continue to pick up.
1.2 Both profit and valuation of exchange Token will be increased
After the inflection point in the token market, further increase in trading volume will increase the revenue of the trading platform, and the amount of repurchase of the exchange tokens will also be increased. In the study of asset bubbles, we find that the upward cycle of asset prices often comes with a sharp increase of trading volume. Due to the incremental funds and the use of leverage tools, the amount of funds in the market increases dramatically which will increase the trading volume afterwards. Meanwhile, new investors who enter the market during the booming cycle period usually are lack of professional knowledge, trying to obtain excess returns through frequent trading. In the progress of price-raising, market volatility is higher than usual and disagreements will increase. In that case, investors will gain more exchanging chips which eventually drives up the trading volume. In the booming market after the inflection point, the procedure fee income of the Token exchange will enter a constant upward cycle, and accordingly, the exchange will spend more to repurchase the exchange tokens.
Meanwhile, the usage demand of exchange tokens will also come forth. Besides sharing the income through the repurchase of the exchanges, users can also reduce the commission cost by holding enough number of exchange tokens and get a commission discount. With the arrival of the inflection point, the number of active investors in the token market will also be increased significantly. The demand of the mainstream exchange tokens will increased greatly, which will change the original balance of supply and demand, thus driving the price of the exchange tokens increase.
Optimism in the booming market will push up the valuation of the exchange tokens. When the inflection point comes and the asset price starts to rise, the emotions and expectations will also be different. In the stage of prosperity and excitement, people think that asset prices will continue to raise and the market will continue to prosper. In that case, the expectations of trading platforms that rely on investor trading behavior are more likely to be positive and the growth rate of these platforms’ profits are believed to maintain a rapid speed, which will raise the valuation of the exchange tokens. With the same profitability, investors in the booming market will tend to buy and hold exchange tokens at a higher price.
2 The logic of the burst of the exchange Tokens: Davis double-click effect
Davis double-click is an investment strategy that means buying potential stocks with stable growth at low valuations, selling them at a higher PE ratio in the booming market, and enjoying the multiple effects of the growth in valuation and performance. In general, Davis double-click effect is likely to occur in bull market. American investor Davis is very interested in this strategy. Buy in stocks of industries like insurance when the market is sluggish and the companies suffering from underperformance, and sold out all the stocks when the companies getting better performance and higher demands to obtained excess returns. In his investment career, Davis expand his asset from $50,000 to $900 million in 47 years, with a compound annual return of 23%.
“Buying brokerage stocks in bull market” is an enhanced version of Davis double-click effect. Improvement of the profit cycle and the valuation increase will bring higher profits. Unlike the classic Davis double-click strategy, brokerage is not a stably growing but a strong cyclical industry. One brokerage company can have an entirely different profit margins in bear market and bull market. In the bull market where comes with large demand, brokerage’s profits will also surge, strengthening the contribution of profit factors in the Davis double-click effect and resulting in higher returns.
The improvement of the profit cycle and the valuation increase will be cashed in stages. Due to the Davis double-click effect, brokerage firms usually increase in valuation in the early period and realize the profit in the later period of the bull market. In the early days of the bull market, even though the trading volume has just begun to increase, the performance has not been improved yet and the market still has a huge difference in expectations. People in the market gradually get rid of bear market mindset and realize that the bull market is coming, which means there will be a raising expectation of profit and the logic of valuation, and the market will go up sharply. In the subsequent stage, the valuations of brokerage stocks will no longer increase significantly, but with the actual improvement in profits, there are still rooms for further price increase.
Brokerage stocks’ upside space after the outbreak period depends on the market expectation of their growth. In the bull market of 2007, the total amount of brokerages was relatively small, and listed ones were even rare. Security brokerage became a high-growth business with the booming of stock market. For example, during the bull market, after the initial explosive growth, CITIC Securities achieved another following magnificent ten times of prices. However, in the bull market of 2014, the Economic scarcity of brokerages was greatly reduced, which made it become an extremely competitive industry. The brokerage stocks no longer grew fast after the initial explosive growth. High-growth tech stocks have become the mainstream of later increase. To a certain extent, after the initial valuation recovery period of the bull market, the further space of the brokerage company depends on the growth of the industry.
Exchange token is a combination of brokerage stock and traditional securities exchange stock that meets the prerequisite of Davis double-click effect. Different from the traditional financial exchanges and brokerages, the token exchanges cover the broker, matching and settlement business, which is a combination of the two. The brokerage’s brokerage business and the exchange’s settlement business are all highly synchronized with the market cycle. In the booming market, there is a high probability of an upward revision of valuation and profitability, and meets the prerequisite of Davis double-click effect. The exchange is one of the few proven earning models in the current blockchain industry. The mainstream exchange token is similar to the BTC, which is one of the digital currency that will almost surely increase in value during the bull market, while the logic of Davis double-click effect enables the exchange token to have a highly explosive power to push up prices.
3 BNB: Bad period ends, glory periods approaching
With the transition of market cycles and the arrival of Davis double-click effect, the token BNB, a leading exchange token, begins a period of rising prices. We believe that Binance has a big advantage and market share in the exchange industry. Although BNB has already recovered its valuation, it may still open up for more spaces for a higher price, due to the increasing usage demand and profitability for Binance.
3.1 Binance: Focuses on its main business, being the absolute leader of Token exchanges
Binance adopts the focus strategy, the operation is in the lead of the industry. Unlike some other major exchanges’ diversification strategies, Binance is holding a cautious attitude to expand, concentrating mainly on trading business, and becoming the leader in the industry. It has big advantages in the quantity of trading pairs, the number of users and the volume of transactions.
In July 2018, CEO Mr. Zhao Changpeng said that the number of registered users of Binance has reached tens of millions, and the data of Binance website displayed by similar websites have reached tens of millions, with an average of 49.21 million, from March to September 2018. It is a magnitude higher compared to its main competitors, such as Huobi, Okex and Bithumb. Binance has a strong profitability, reaching $350 million in the first two quarters of 2018. In the exchange industry, Binance’s focus strategy has been successful and it makes Binance a leader in the exchange industry.
The success of Launchpad has attracted a lot of attentions and users, leading a trend for this industry. Binance’s asset-issuing platform, Launchpad, has recently resumed its token launch, which has sparked the market’s enthusiasm. The three listed projects BitTorrent, Fetch.AI and Celer Network have received widespread attention in the market and brought a new profitable trading effect from “buying new tokens”. Through asset pricing service, Launchpad helped the new project to generate high circulation and popularity, but at the expense of the project’s partial profit. In addition, pricing service also contributes to community ideas consensus. With the emergence of the earning effect, Launchpad will provide a better issuing environment for the project, and the improvement of the issuing environment will also attract more high-quality project resources and creating a virtuous circle. The success of Launchpad had not only brought user flow to Binance, but also led the trend of the industry. Recent phenomenon shows that a big amount of exchanges announced plans for similar service.
3.2 BNB: Core asset of new cycle, the leader of exchange tokens
BNB is Binance’s exchange token. The usages include fee discounts, listing votes and new launches on Launchpad. With a total of 200 million BNBs, Binance will repurchase them with 20% profit by every quarter, until the number reduced to 100 million. This is an indirect dividend mechanism where BNB holders can share the benefits of Binance. At the same time, investors holding a certain number of BNBs can get a fee discount and listing voting rights on the Binance platform. These usages of BNB depend on the development of Binance and are a transferable membership certificate. If Binance platform develops well, after the repurchase, the usage requirements will be sufficient to support the value of BNB, and the main attributes of BNB will be transferred from the dividend to the application.
In the global market, the scale effect of the tokens exchange is obvious and the leading ones whose exchange tokens have great potential have higher growth. The tokens naturally have the function of peer-to-peer trading, which can flow freely cross border, and its trading market has the characteristics of globalization. Due to the combination of exchanges and brokers business, the leading exchanges with its scale effect can not only provide better trading services, but also have great advantages in market depth and variety. The significant scale effect of the token exchange industry has allowed the leading exchanges to gain higher growth. They can not only expand the scale from the market increment, but also easily capture the market share of small exchanges through the competition within the industry. Its growth potential is higher than the leading broker in traditional finance. With the expansion of the size of the leading exchanges and the accumulation of advantages, their exchange tokens have a large growth potential in the amount of repurchase funds and application demand, and thus has a large upside space for price.
Based on the Binance ecology, BNB price has a large upside space. The short-term value of BNB is mainly based on Binance’s repurchase, which is closely related to Binance’s financial performance. In the long run, BNB price depends on the Binance’s user growth and BNB’s future demand brought by cryptocurrency’s ecological development. At this stage, the token market has passed the dark moment and the long-term inflection point is approaching. Binance’s performance has rising expectations and the scale effect of the exchange industry is conducive to Binance providing better service at a relatively low marginal cost, thereby gaining more users and market share. From the two perspectives, BNB has space to rise.
Valuation of BNB has been recovered, and the extent of Binance’s performance growth and BNB’s usage demand increase may determine its follow-up trend. With the warming of the token market, BNB also had experienced a 149.3% increase. According to the study of Davis double-click effect, we believe that this is mainly the recovery of the BNB valuation in the context of the end of the bear market and the recovery of the transaction. In the future market, driven by Binance’s profit growth and increased demand for applications, BNB may continue to rise, but this part of gain has greater uncertainty.
