Introduction to Binance and BNB

Binance is a blockchain ecosystem comprised of a pure cryptoasset exchange, Labs — a seed fund to strengthen the ecosystem, Launchpad — a platform to launch new blockchain projects, and Info / Academy that provide data and information around the blockchain space. The exchange was launched in July 2017 by Changpeng Zhao (CZ), who is also the CEO. Binance exchange is one of the fastest growing and most popular cryptoasset exchanges, while also being the biggest with over $1bn in daily trading volume.[1]

BNB and Token Supply: The native token for the Binance ecosystem is BNB. BNB runs on the Ethereum blockchain and follows the ERC20 token standard. The token was established with a total supply of 20 million (mn). Binance conducted an ICO, where they issued 100mn tokens in a public sale at an issuance price of $0.1553 / token. Another 20mn tokens were issued in a private sale to angel investors, whereas the remaining 80mn were allocated to the Binance team. Of the tokens allocated to the team, 16mn were released after launch, with another 16mn being released every year for the next four years. Furthermore, Binance uses 20% of their profits each quarter to buyback and burn BNB, until 50% of the total BNB supply (100mn) is burned.

Use Cases: The BNB token itself has multiple utility use cases, essentially as the underlying gas that powers the Binance Ecosystem. We see the current most prominent use cases for BNB as:

  1. Payment for trading fees on the cryptoasset exchange. Binance incentivizes holding and using BNB by applying a 50% discount on trades (during the first year) if fees are paid by BNB. The discount is halved every subsequent year until full fees apply after 5 years.
  2. Repurchase of BNB with profits of Binance. Every quarter, Binance uses 20% of their profits to buy back BNB and destroy them, until 50% (100mn) of all BNB are bought back. This characteristic leads to recurring demand for BNB and a decreasing supply of BNB in the medium to long-run.
  3. A variety of use cases pooled in one category “Others”. This includes the usage of BNB as a pure investment asset to indirectly participate in the growth of the Binance ecosystem, and the future usage as gas for a planned decentralized exchange. Further holding of BNB is incentivized through additional voting power in community coin voting, double referral bonus, and usage on 3rd party platforms such as crypto.com (former: Mona.co).

We will focus on these three use cases when calculating and modeling demand for BNB in the valuation.

Price development: BNB’s price grew shortly after the ICO and stabilized at around $1.5 per token until the sharp increase at the beginning of December 2017. The prices peaked at over $22 after the height of the speculative bubble in early January 2018. BNB’s price was subsequently falling significantly, following the general bearish market trend. With the overall crypto market down around 80% since the height of the bubble, BNB is currently down 54%. For comparison, Bitcoin which is also performing “better” than the rest of the crypto market, is down almost 67% as well. Therefore, one could argue that BNB lost actually significantly less value than the general market and even performed better than Bitcoin in the period after the crash.

Binance’s next BNB buyback is expected on October 18th. This might lead to a small price increase in the short-term. Otherwise, we expect prices to stay flat or slightly decreasing in the short-term, since market sentiment is still bearish and the overall crypto market is strongly correlated with Bitcoin’s price movement. However, we are bullish regarding BNB’s long-term price development as highlighted in the valuation.

Figure 1: BNB Price Development

Recent news: Binance announced earlier this year its intentions to open an office in Malta after stricter regulations were enforced in Japan and China, where they had offices in the past. In addition, Binance is backing plans to create the world’s first decentralized, community-owned bank in Malta, with tokenized ownership.

Earlier in August, Binance LCX, a joint venture between Binance and Liechtenstein Cryptoassets Exchange (LCX), announced the launch of a crypto-fiat exchange in Liechtenstein to enable trading between CHF and EUR against major digital currencies. In the past, Binance also presented plans to move to Jersey to add EUR and the GBP to its supported currencies. Most recently, Binance announced the start of private beta testing of a crypto-fiat exchange in Singapore in September.

There seems to be a clear strategic intention to move away from a pure cryptoasset exchange, towards an exchange with fiat-to-crypto capabilities. It is also evident that Binance is moving its operations to the jurisdictions with the most crypto-friendly regulators to obtain an exchange license. However, Binance’s history of moving from jurisdiction to jurisdiction as regulatory pressure increases should be observed critically and might pose future risks for Binance. Binance also supports a range of other projects, for instance in August, Binance raised $32mn along with other blockchain investors for a stablecoin project called Terra. A functioning stablecoin with integration to a leading exchange like Binance could be a highly relevant achievement for crypto exchanges and investors alike.

Furthermore, Binance launched a $1 billion venture capital fund this summer designed to incubate blockchain projects. The investments will be made using BNB. Strategic investments in the blockchain space could further strengthen Binance’s ecosystem and also increase demand for BNB in the medium to long-run.

This report aims to provide investors with guidance to decide on a fair market value for BNB. Our fundamental-based assessment and valuation approach is focused on the long-term value of Binance Coin, but is not to be seen as a short-term price prediction.

Valuation of BNB

Figure 2: BNB Valuation

Valuation Methodology

BlockNovum’s valuation approach follows a fundamental analysis methodology. Our financial model aims to indicate if an investment in BNB is worthy of long-term capital allocation, given the discounted utility value of one BNB token. Consequently, this analysis aims to assess the long-term potential of BNB and identify if the asset is under- or overvalued.

Fundamental valuation: It is crucial to note that cryptoassets are not companies and hence they don’t have cash flows. Traditional financial models used by asset managers, such as discounted cash flow (DCF), are not suitable for cryptoassets. Therefore, we use a valuation methodology based on the theoretical framework of the equation of exchange (MV=PQ), which prices markets by balance of supply and demand. [2]

Hence, the valuation framework derives a token’s utility value by the following method:

  1. Modeling the cryptoasset supply given the various factors that influence the number of tokens (release schedule, mined tokens, burn rate etc.).
  2. Forecasting demand for the underlying resource or service that the cryptoasset network provisions (the network’s ”GDP”). This can also be seen as the USD value of the monetary base that is necessary to facilitate the use cases within the cryptoasset network. There can be just one specific use case or multiple.
  3. Dividing the demand by the monetary base available of the respective cryptoasset (supply) to obtain the per-unit utility value.3.

A comprehensive description of the valuation methodology is provided in our first report that covers Bitcoin (BTC).

BNB Valuation Description

Supply: Binance’s supply characteristics were described above. The current available supply is around 144.4mn BNB tokens, while the current total supply was reduced from 200mn to 192.4mn tokens through the buybacks over the last four quarters. We calculated that the last tokens are expected to be burnt mid-2025. The forecast considered the projected fee revenue of the Binance exchange and the changing profit margin of Binance.

In addition, we reduced the number of tokens in the supply by a fixed percentage to account for the share of BNB holders that don’t use the token, but hold it as a long-term investment (so called “hodlers”). Based on a study by Bithumb around 30%-50% of investors plan to hold cryptocurrencies as a long-term investment and don’t actively use it. Since a smaller supply corresponds to a higher value per token (ceteris paribus), we follow a conservative approach and assume a 30% fraction of BNBs that are not used.

Figure 3: BNB Supply Development

Use Cases: We previously identified three use cases for BNB and are now going to briefly describe each of them:

1. Payment for Trading Fees

We model demand for BNB to pay trading fees as a function of the number of active Binance exchange users multiplied with the average fee spending per Binance user.

The number of Binance exchange users is baselined from the current number of users (over 10mn). Future development is modeled from Binance’s user market share of the total number of crypto exchange users. The number of total crypto exchange users is modeled as an S-adoption curve in relation to equity exchange users (assuming that number of crypto exchange users will max at around 40% of equity exchange users after 2030). Today’s number of crypto exchange users is estimated at around 50mn, which corresponds to around 13.7% of equity exchange users. This is reflected in the graph below.

Figure 4: Crypto & BNB Exchange User Projections

Once we have modeled the number of Binance users, we categorized them for each year depending on which fee discount category they are subject to. Since not all users are actively trading, we used the official Binance data that states that 50% of users are active (1+ trades per day) to obtain the final number of active Binance exchange users per year.

As a last step, we calculated the average BNB fee per active user / day from the existing fee revenue and profit data.

Figure 5: BNB Trading Fees / active user

Then it is possible to obtain the annual trading fee revenue in BNB for the observation period, by multiplying the number of active users in each category with the appropriate annual BNB fee / active user. To illustrate, the total market demand [P*Q] of use case 1 in 2018 is calculated at 56.8mn BNB tokens. This and other results are shown in the valuation overview in figure 2.

Note: We then applied the current BNB/USD exchange rate of $9.6 to get the monetary base (market capacity) of each use case in USD. E.g. $545mn in BNB trading fees equals a market demand for BNB of corresponding size.

2. Repurchase of BNB with Binance profits

After calculating Binance’s fee revenue in BNB in use case 1, we can now apply Binance’s profit margin to determine Binance’s profit from trading fees. It is estimated that Binance has a 65% net margin today on its trading fees. Due to the increasing size of the Binance ecosystem and ensuing cost increases, we expect this margin to shrink over time. Therefore, we assume that the net margin declines by 5 percentage points every two years.

Figure 6: Profit in BNB Projections

Binance uses 20% of their quarterly profit to buy back and burn BNB. Consequently, we can calculate the demand to repurchase BNB from the calculated values. For example, in 2018 we calculated estimated fee revenues of BNB 56.8mn, which then results in a profit of BNB 36.9mn. 20% of this corresponds to 7.4mn of BNB tokens that are bought back.

3. Others

This catch-all category includes all other use cases (as described before) and is derived from BNB’s trading volume. As a basis, we use BNB’s trading volume adjusted for the volume by use case 1 and 2. The trading volume is historically given for 2017 and for more than eight months in 2018. Future trading volume is extrapolated from equity market trading volume that serves as a proxy for the development of trading volume in the crypto market. We estimate that crypto markets are reaching 20% of global equity market trading volume after 2030. Next, we apply BNB’s share of crypto trading volume which is at 0.55% today (set to be constant for future periods).

To illustrate this as an example, global equity market volume in USD is forecasted to be $84 trillion in 2019. Given our S-curve, crypto market volume is at 7.8% (today: 5.9%) compared to equity market volume by the end of 2019. This results in a volume of $6.58 trillion in annual crypto trades. Applying 0.55% yields $35.9bn in annual BNB trading volume. This number is then adjusted for the volume of use case 1 and 2.

The result is a “GDP” facilitated through use case 3 in the magnitude of $35.3 trillion for 2019.

In contrast to use case 1 and 2, this is not equal the monetary base since every token can be used multiple times in a year to enable this size of trading volume.

Velocity [V]: Velocity describes how many times one BNB changes hands per year. Use case 1 and 2 have a velocity of exactly one, since BNB is only used once in order to buyback BNB / facilitate BNB fee revenue size.

However, for use case 3 each BNB is used multiple times to enable the calculated trading volumes. The current and historic velocity can be calculated by dividing the total BNB trading volume by the total BNB supply in a given year.

For 2018 a velocity of 24.3 is calculated, which is then used as a basis for future years. Velocity is assumed to grow at a same pace as the number of BNB users. E.g. growth of 5% results in velocity of 25.5 in 2019.

Required Monetary Base of BNB [M]: Finally, as stated in the equation of exchange “PQ” can be divided by “V” to get “M”. We are then able to calculate the required monetary base for use case 3 (i.e. how much does BNB’s total supply need to be worth to facilitate the use case economy). To continue the aforementioned example, we divide the “GDP” of $35.3 trillion by the velocity of 25.5 to get a necessary monetary base (market demand) of $1,384mn in 2019.

Discount rate: The model employs a high discount rate of 30% to account for the uncertainty regarding the modeled outcomes. Depending on the cryptoasset maturity, an even higher discount rate could be chosen. For comparison, venture capital normally uses discount rates in the range of 30% to 60% depending on the stage of the investment. Since BNB is a well-established cryptoasset with a strong position in the market, clearly defined use cases, and backed by a profit-making company, we find the 30% discount rate appropriate.

Time horizon: We projected the development of BNB in the valuation model until 2028. However, to provide a more realistic view and to reduce additional uncertainty, we valued BNB by only taking into consideration the forecast until 2023. This corresponds to a 5-year time horizon (To be exact: 5.2 years — standing Oct 2018).

BNB Valuation Results

Result: We calculate BNB’s current (Oct 2018) present value (PV) at $17.7 by discounting the projected utility value of BNB in 2023 until today. The discounted utility value of BNB is expected to be at $18.8 by the end of 2018.

Compared to its current price level of around $9.6, BNB is priced significantly below what we consider to be its long-term fair value. Given the high availability and quality of data related to Binance, we argue that BNB is undervalued also given it’s end of 2018 utility value calculated at $15.6.

The utility value represents the “value” inherent to one BNB token, which is needed to facilitate the size of the Binance economy (three use cases) today. BNB’s current demand and supply characteristics are supported by the wide usage as a means of payment for trading fees, the indirect participation in Binance’s profit, and the holding as an investment or for referral bonus / voting power purposes. Consequently, today’s usage of BNB would justify a higher price level as indicated by the valuation.

Decomposition: The present value can be decomposed into its two components — utility value today and discounted expected future utility value (speculation). This shows that a big part (88%) of BNB value is attributed to today’s utility value, and only 12% are based on future expectations. One could explain this with the fact that Binance has a functioning service that is the leader in its space, which gives BNB actual usage value. Therefore, there is less uncertainty than with most other cryptoassets, which have products/services that are still in development.

Figure 7: Composition of value

Utility Value Projection: Figure 8 illustrates BNB’s forecasted utility value development in line with the expected growth of its use cases.

Figure 8: Utility value projection

Key Model Variables: It has to be noted that the outcome of the valuation is highly dependent on a few key variables. These variables are: the chosen velocity, discount rate, max % of crypto trading volume vs. equity trading volume, and the % of tokens that are not used (“hodl’d”).

We chose the model inputs that we found to be the most realistic given the data availability. Generally, we followed a more conservative approach and chose inputs at the lower end of the range. Therefore, even though the obtained result is not an exact science, we argue that the valuation still provides a realistic price range based on fundamentals and is a useful tool for investors to assess / discuss the current market price levels.

Sensitivity Analysis: To illustrate the varying outcomes depending on the chosen discount rate and velocity, a range of present values for BNB can be observed in the sensitivity analysis below. Note that the changes to velocity only apply to use case 3.

Figure 9: Sensitivity Analysis (BNB PV of Utility Value in 2023)

Consequently, depending on the investor’s risk appetite reflected in the discount rate, BNB’s present value of its utility value in 2023 is substantially higher or lower. Even with a higher discount rate of 40% and a higher velocity of 40, the PV is still calculated at $10.

Scenario Analysis:

Following figure provides a view on the range of outcomes regarding BNB’s future utility development, depending on the % of tokens that are assumed to be not used (instead they are held by investors — “hodl’d”).

Figure 10:Different levels of unused tokens (“hodl’d”)

One can observe that the lower the supply of tokens (ceteris paribus), the higher the utility value per individual token is going to be. For instance, the graph shows that even with an assumption of 0% unused tokens (all available tokens are in the float), BNB has a utility value of $10.9 by the end of 2018. This means even with the most conservative assumption, BNB is still undervalued in this context.

Figure 11: Crypto Trading vs. Equity Trading Volume (how it affects BNB PV)

Lastly, figure 11 displays different scenarios regarding BNB’s present value given varying levels of crypto trading volume vs. equity trading volume. Using the given data basis, we calculated that today’s crypto exchange trading volume is at 5.6% of equity exchange trading volume. Hence, the valuation takes into consideration (via an S-curve model), how fast crypto trading volume is growing in relation to equity volume. The percentage value in figure 11 represents the maximum level of trading volume that cryptoassets are going to reach by 2030 in comparison to equity trading volume.

As a result, even with a stagnating share of crypto trading volume (5%), today’s BNB PV is calculated at $12.0. In contrast, the scenario of crypto trading volume in the size of 50% of equity trading by 2030 would result in a PV of $29.1.

Summary: To sum up, given the assumptions made, BlockNovum is of the opinion that $17.7 is a justified current fair value of BNB (as of October 2018). However, this is not a short-term price prediction but instead an indicator of the long-term value of one BNB, given that BNB’s role in the analyzed use cases develops as expected until 2023. We expect 88% of today’s present value to be based on current utility and 12% on speculation of future utility value.

A scenario and sensitivity analysis showed that even with more conservative inputs, BNB’s present value and calculated utility value in 2018 are still above the current market price of around $9.6.

Qualitative Assessment of Binance

In addition to the valuation, BlockNovum also applies a qualitative assessment framework to evaluate cryptoassets and blockchain startups as a potential investment. The assessment framework consists of several factors to provide a holistic view on the project’s investment potential and suitability.

Given BNB’s close relationship and interdependence with Binance, we now have a closer look at the actual company. This part exemplifies BlockNovum’s due diligence methodology for blockchain startups, which considers 10 factors we consider relevant. This framework is slightly different from the Cryptoasset assessment framework (see BTC report).[3]

Figure 12: Blockchain Startup Assessment Framework

For each factor we analyze the startups situation given the available public data, internal documents[4], founder interview[4], and BlockNovum’s expertise in the blockchain space. We then form an opinion on the investment opportunity for each factor, by providing an indicative rating in the range of “Very Positive” (9–10), “Positive” (7–8), “Neutral” (5–6), “Negative” (3–4), “Very Negative” (1–2).

Business Model and Product-Market Fit

Binance operates a pure crypto exchange with the ambition to extend it with fiat-to-crypto trading capabilities. As a centralized exchange, Binance allows buying and selling of a high number of cryptoassets (140+), while also providing liquidity through high trading volume.

Binance’s model is also focused on super-fast user onboarding on the platform (at the peak of the bubble they allegedly onboarded around 240k new users in just one hour). On a technical side, Binance has the ability to handle 1.4mn orders per second. In addition, the platform can currently host 20mn users, offers multilingual support, and has numerous trading and information tools.

The main business model of Binance is based on revenue generation via trading fees. Furthermore, they also charge several $100k in listing fees, to get a new cryptoasset listed on the exchange. However, CZ recently announced plans to donate listing fees to charity in the future, which would eliminate this income stream.

Binance currently has over 10mn users, of which around 5mn are expected to be active users, while also being the biggest crypto exchange with over $1bn in daily trading volume. The explosive growth of Binance’s user base and trading volumes in just a year underscore the strong market demand for an easy-to-use cryptoasset exchange.

Rating: 10/10

Decentralization Edge

Binance itself provides the infrastructure and platform to trade a wide variety of tokens. It has a clear use case to enable the exchange of a big selection of cryptoasset for a wide audience, while also being easy to use and being able to onboard new users at a rapid rate.

As a central entity controlling the Binance exchange, Binance is not decentralized at all. Therefore, there are risks regarding hacks, regulatory pressure, privacy issues, and the centralized technical infrastructure. Binance is planning to counteract some of these concerns by launching a decentralized exchange in the future.

BNB is an ERC20 token on the Ethereum blockchain. Since it was issued by one company “Binance”, BNB can be seen as a form of a centralized “company coin”, because Binance still has control over a big quantity of BNB. In an interview with Laura Shin this September, CZ talked about how they are planning to move BNB to their own decentralized blockchain in the future, to ensure that BNB’s usage for additional use cases (e.g. payments for services in ecosystem) is based on a decentralized network.

Overall, Binance has a clear use case in the blockchain space, but as a centralized entity displays some vulnerabilities (for now).

Rating: 7/10

Market Opportunity

It is estimated that there are around 50mn crypto exchange users globally today. With its 10mn users, Binance has a market share of 20%. We expect that the majority of Binance’s user base is located in Asia and Europe, since Binance is not that US-focused. Since there are hundreds of active cryptoasset exchanges today, we expect strong consolidation trends to appear within the next few years. The rise of decentralized exchanges, increasing regulatory requirements for exchanges, flattening trading activities in the short-run, quality and usability differences among exchanges will all lead to the emergence of clear winners among exchanges. Binance is strongly positioned to capture more market share of their competitors in the coming years.

Furthermore, our financial model projects that there will be 120mn crypto exchange users at the end of 2023. We conservatively estimate that Binance can grow its market share to 26%, which corresponds to 31mn users by 2023. This means that Binance could grow its user base by a factor of 3x in the next 5 years.

Nevertheless, it has to be taken into consideration that the market size for crypto trading is highly dependent on the future developments around ICOs, tokenized assets, price movements, mainstream adoption, and future regulatory requirements. These are all uncertainty factors that will impact the market opportunity significantly.

Note: This market size assessment is only focused on Binance’s crypto exchange. We also assume that Binance can gain market share in its newer offerings, which are currently difficult to assess.

Rating: 8/10

Go-To-Market Plan and Product Roadmap

Binance’s whitepaper is rather short, stays on a high-level, and does not include any clear type of product roadmap. However, Binance published an article “Binance’s First Year in Review” in July that provides a short overview about the current product roadmap. The company has a wide range of initiatives with the aim to build up an ecosystem around the Binance exchange, where BNB is the native payment token.

Next to the existing Binance crypto exchange, Binance works on following products/initiatives:

  • Fiat-Crypto Exchange - “Uganda” and others: Binance is launching “Uganda”, their first fiat-crypto exchange, where registrations just opened. (Live)
  • Decentralized Exchange: Unclear when launched, demo video published in August. (Planned)
  • Binance Launchpad: ICO platform to launch a project. Funds can be raised via BNB. (Live)
  • Binance Labs: The Binance VC fund with the goal to incubate and invest in projects to strengthen the Binance ecosystem. (Live)
  • Binance Chain: Binance’s own blockchain. The focus will be on performance, ease-of-use, and liquidity, which could mean that privacy and/or security could be less in the center of attention. BNB will be the native coin of this blockchain. (Planned)
  • Binance Info: “Codex” and information source for different cryptoassets. (Live)
  • Binance Charity Foundation: Assumed to be a foundation to donate listing fees to charity. (Planned)
  • Binance Academy: Education and trainings platform for topics around blockchain / cryptoassets (Live)
  • Binance Research: Announced, but no further information available (Planned)
  • TrustWallet: Binance acquired Trust Wallet in July for storage of Ethereum based tokens (Live)
  • Founders Bank: First decentralized and community-owned bank in the world, based in Malta (Planned)
Figure 13: Official Binance Roadmap (Source: Binance Blog)

In addition, Binance is working on various apps for multiple platforms.

Overall, Binance has a launched wide range of initiatives to build an ecosystem around BNB. While many projects are in the early stage, Binance has a clear vision and the resources to become a powerhouse along the blockchain investing value chain.

Rating: 9/10

Team, Leadership, and Governance

We have some concerns regarding Binance’s team and leadership. First of all, there is very little public information regarding the number of employees and the various leadership positions within the company. According to LinkedIn, Binance currently consists of over 470 people globally. However, many of these people are actually not employees of Binance. We could not find any conclusive information that would have helped to assess the size of the team and their capabilities in growing the business.

Furthermore, apart from Changpeng Zhao, all other leadership team members listed in the Whitepaper are not at Binance (or have never been) according to their LinkedIn profiles. This might just be an issue of outdated or incomplete data, but could also indicate profound concerns regarding Binance’s leadership composition.

CZ himself has a background related to tradebook development at Bloomberg, spent 8 years at Fusion systems in an IT development role, and gained leadership experience at two other blockchain related companies in the past (even though they were rather short engagements of only 1+ years).

Ella Zhang (head of Binance Labs), one of the only other leadership roles we could identify, has an MBA from Stanford and was an investment director at the VC firm Kleiner Perkins.

CZ’s track record of growing Binance from a small startup to a global billion-dollar business within a year, is definitely impressive. His sense for business, fast decision making, finding the right timing, and scaling up a business brings us confidence that he can grow Binance and the whole ecosystem significantly in the upcoming years. On the flipside, we are concerned regarding the low availability of public information regarding the company, its leadership, the governance structure, and the team behind it.

Rating: 5/10

Financial Projections and Funding Strategy

Binance was initially funded via the initial coin offering in July 2017 that raised approximately $15mn. Shortly after in September 2017, the series A funding round led by Chinese VCs Blackhole Capital and Funcity Capital raised another undisclosed amount of capital. There were also talks with Sequoia Capital and allegedly IDG Capital, which resulted in disagreement over the valuation and in a legal dispute over violation of an exclusivity agreement.

Binance reported around $300mn in profit after the first half of 2018. In an interview at the end of September, CZ said that he expects Binance’s 2018 profit to be in the range of $600–800mn. These profit numbers are astonishingly high for a company that was just founded around 14 months ago. Therefore, given that Binance is making significant profits and is able to self-fund and grow its business, we don’t expect any further funding rounds anytime soon.

Binance’s final results at the end of 2018 will be highly anticipated, since they might shed some more light on the long-term sustainability of its profits. For now, Binance seems well funded and has more than sufficient capital to grow and extend its business. Nevertheless, since none of the above numbers have been audited or otherwise been proven to be correct, we decrease our rating by 2 points.

Rating: 8/10

Token and Issuance Model

Binance’s token issuance model and use cases were described in detail on page 3. We view BNB as one of only very few “utility tokens”, which actually already has utility today and is actively used by everyday users. Even though the token does not have ownership or voting rights in the company Binance, we expect it to capture value related to Binance’s future developments. Since Binance uses its profits to buyback BNB and due to BNB being in the center of the Binance ecosystem, we see significant value appreciation potential as outlined in the valuation section.

Another point worth noticing is the fact that 64mn BNB are vested for several years before they are gradually released to the Binance team. Given the long-term vision of Binance, it might be beneficial to have even more long-term incentives in place though. In addition, we have some more concerns around BNB’s classification as a utility token since many industry exponents (often with a US-focus) view it as a security token in reality. This could lead to regulatory issues in the future.

Rating: 7/10

Ecosystem, Support and Partnerships

Binance does not have many partnerships apart from a few single partners, such as Uplive, where BNB can be spent for a product or service. According to CZ, it is planned that BNB (in addition to its functionality in the Binance ecosystem) can be spent as a means of payment for various products in the future (hotels, airline tickets etc.). However, nothing concrete is public yet. Since Binance builds out its own ecosystem via internal projects and investments through Binance Labs, they don’t require much external support in our view. Hence, even without many partners we see Binance in a comfortable position in this category.

Rating: 8/10

Uniqueness and Competitors

There is no shortage of competition in the crypto exchange industry. According to Coinmarketcap there are around 220 cryptoasset exchanges operating in the world. From our experience they often offer a very similar user experience and trading tools. The main difference is often the type of cryptoassets which are listed, the trading & listing fees, and the characteristics of the native exchange-token (if any).

Many exchanges have been confronted with accusations of wash trading to artificially inflate trading volume to create the illusion of an active exchange and liquidity. Binance’s CZ has often denied any involvement of wash trading, which is also reflected on Coinmarketcap where the reported trading volume is equal to the adjusted trading volume.

We view BNB in a comfortable situation regarding its competitors, since it’s one of the only exchanges that is actively building up a whole ecosystem around its core offering. With their various products, they can basically provide services along the whole value chain.

One of Binance’s downsides is that they don’t offer fiat trading pairs yet. This is also related to Binance’s very lax KYC / AML enforcement. Most exchanges that offer fiat-crypto trading, such as Coinbase, Gemini or Kraken, have implemented KYC rules and follow certain regulatory guidelines (e.g. New York’s BitLicense for crypto exchanges). However, this might change with Binance’s launch of their fiat-crypto exchange.

To sum up, Binance is well positioned against its competitors and manages to stand-out in a market that is otherwise full of hardly-distinguishable providers. Missing fiat trading pairs and lax KYC rules led to a decrease in the rating.

Rating: 8/10

Investment and Exit Options

It seems as if there are no plans for further external funding for Binance at the moment, which leaves investors with the only option of investing in the BNB token to get some exposure to Binance’s future growth. As a widely-traded and highly liquid cryptoasset, investors can buy & sell BNB at any time. The only concern for big institutional investors is the market impact of large transaction sizes and price slippage.

Due to the low amount of options to invest in Binance, we rate this factor as “Neutral”.

Rating: 6/10

Company-specific Risks

We see Binance subject to a couple of risks. First, Binance is a central entity and therefore the risk of hacks and other security breaches exists. Theft of significant client funds / tokens, or hacking of client data could have a long-lasting negative effect on the company. Loss of users, financial damage, and even shutting down the business might be consequences of a wide-ranging breach.

Second, BNB itself does not generate any cash flow and only provides indirect exposure to Binance’s success and future growth. Therefore, even though we see BNB as an undervalued token, there is not a one-to-one relationship with Binance that will influence its price.

Third, Binance’s status as a pure cryptoasset exchange without many KYC/AML regulations and its somewhat shady history of moving jurisdictions to avoid regulations, opens up a lot of legal and regulatory uncertainty for the future. Bans or fines from regulators could be a threat in the future. In addition, in either case we expect that Binance needs to commit significant resources in the near future to stay compliant in all regulations where they are operative.

Fourth, most financial and company data is not public and not audited, which bears a risk of overstated metrics, such as revenue, profit, or user numbers. Binance is only slightly more than one year old, so this might change for the better in the foreseeable future.

Fifth, a potential market entry of established stock exchanges via their own platform or via a partnership, might pose additional competition. Existing players would have the necessary infrastructure and know-how, and could work together with the regulators from the beginning to avoid any legal/regulatory risks. This could be a main selling point for institutional exchange users, which would want to avoid using any type of exchanges that are doing business in a legal greyzone.

Overall, we view the regulatory issues with the most scrutiny. The company itself seems well managed, has not suffered any hacks (despite being the biggest exchange — honeypot), and has a promising strategy for the future.

Investment Thesis

We believe that Binance was able to grow a massive userbase and become the biggest crypto exchange due to its ability to move incredibly fast. They managed to assemble a team, get ICO funding, and launch a trading platform in a matter of weeks. The right market timing combined with their ability to onboard users very quickly, offer a wide range of popular cryptoassets, and handle large number of users was definitely one of the key points for their early success. The BNB coin with its utility for discounted fees and with its profit buyback mechanism, was innovative for its time and further supported user growth. While moving fast, Binance might have also stepped into some legal greyzones, by avoiding local regulations through relocation to other (more crypto-friendly) jurisdictions. Furthermore, it can’t be denied that Binance listed several low-quality tokens on their exchange, which might leave a tainted reputational mark.

Nevertheless, we see Binance as well-positioned as the leading cryptoasset exchange for a future where cryptoassets become more and more accepted in the broader public. CZ and his team realized that by building a whole ecosystem around Binance and its native BNB token, and by offering services along the whole value chain, Binance can positively influence its own market position and set itself up for long-term success. As a result, they managed to become one of the most distinguished exchanges, and with CZ they have a very popular crypto persona as their CEO.

The various initiatives with the BNB token at their center make us feel optimistic about BNB’s ability to capture long-term value. This view was confirmed by our long-term fundamental-based valuation that yielded a present utility value of one BNB token at $17.7.

Average Rating: 7.6

Figure 14: Qualitative Assessment Scores

About BlockNovum:

BlockNovum is a Swiss Blockchain and Cryptoasset investment research & consulting firm. We provide professional assessments, fundamental valuations, and market research reports for the emerging asset class of cryptoassets & blockchain startups. Our target client segment includes mainly institutional investors (VCs, family offices, [Crypto]-funds & other asset managers) with an interest in allocating capital to cryptoassets or blockchain startups. Additionally, we also offer our reports and consulting services to accredited investors, such as business angels.

Mission: Founded in 2018, we are a startup that wants to advance the quality of fundamental cryptoasset research to a professional level to provide institutional investors with high quality market screening, due diligence, and valuations.

If you are interested in similar reports or customized consulting services, please contact us at info@blocknovum.com

References:

[1] Sources: The report is based on data from Binance.com, coinmarketcap.com, Interview with Changpeng Zhao (Binance CEO), public media coverage of Binance

[2] Our financial model bases on the pioneering research conducted by Chris Burniske, Alex Evans, Dmitry Kalichkin and others, who laid out the foundation for cryptoasset valuations.

[3] The due diligence framework used may be adjusted in future reports & client requirements are considered.

[4] If applicable, depending on the stage in the due diligence / investment process.

General Risks of Investing in Cryptoassets

Investing in BNB and any cryptoassets will expose investors to a number of risks that are listed below. Cryptoassets are a new asset class but show similar characteristics to other alternative investment categories, such as venture capital. Therefore, we expect investors to understand the high risk nature of investing in cryptoassets and that you or the organization you represent possess the appropriate income, net worth, and professional experience to invest.

Investing in cryptoassets may include the following risks:

· Cryptoassets are subject to volatile price movements and in the short-term prices are often moved by market sentiment.

· Changes in global demand of a cryptoasset through changing levels of acceptance by consumers, exchanges and other corporations may adversely affect the cryptoasset’s long-term market potential and prices.

· Theft of cryptoasset tokens from an online wallet or hacking of exchanges can lead to the unrecoverable loss of tokens. However, this risk can be mitigated with the right precautions around storage and custody.

· Regulators are still catching-up to this emerging asset class. Therefore, changes in regulations may lead to legal liabilities or even bans of certain cryptoassets and the related organizations. News announcements around regulations might also affect cryptoasset prices.

· Depending on the jurisdiction, investing in cryptoassets leads to tax liabilities. Often, there is no final framework in place yet regarding how to tax cryptoassets, which leads to some uncertainty and requires you to keep detailed records of all transactions.

· Most cryptoassets itself do not generate any cash flow. Most cryptoassets should be thoroughly assessed regarding the associated token rights.

· Competition from other payment technologies, services, or other cryptocurrencies could lead to a lower expected market share and negatively affect prices.

· Potential reputational damages due to relation with cryptoassets.

Disclosures and Further Information

At the time of publication, BlockNovum does not hold any amounts of BNB. However, the author has invested a small amount in BNB and related cryptoassets.

The information herein is based on sources that BlockNovum considers reliable, but its accuracy is not guaranteed. All statements made in this report are strictly beliefs and points of view held by BlockNovum after conducting careful research. Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on BlockNovum’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Neither BlockNovum, nor any of its employees shall have any liability, howsoever arising, for any error or incompleteness of fact or opinion in it or lack of care in its preparation or publication.

The information contained in this report are not a representation by this corporation / cryptoasset, nor is any recommendation made here based on any privileged information. This information is not intended to be nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security or cryptoasset mentioned herein. Nothing contained herein constitutes investment, legal, tax or other advice and is not to be relied on in making an investment or other decision. Investors should determine for themselves whether a particular service or product is suitable for their investment needs or should seek such professional advice for their particular situation. This document is intended for those with an in-depth understanding of the high risk nature of alternative investments and these investments may not be suitable for you.

This firm, BlockNovum, its employees, and members of their families, may have a position in any security discussed in this report or in related securities and may make, from time to time, purchases or sales thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change without further notice. Additional information with respect to the information contained herein may be obtained upon request.

©2018, BlockNovum GmbH. All content and figures are original and have been researched and produced by BlockNovum, unless otherwise stated herein. No part of this content may be reproduced in any form, or referred to in any other publication, without the express written permission of BlockNovum.