Estimating “Real 10” Exchange Revenue

Understanding the scale of the world’s largest crypto exchanges

April 11, 2019

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During the bull run in 2017, cryptoasset prices soared and irrational exuberance was rampant. The now infamous NYT article “Everyone is Getting Hilariously Rich and You’re Not” proved to mark a cyclical top. People were “investing” without regard for fundamentals or valuation frameworks into projects with little to no development. And many speculators did strike it rich.

Some 2017 tokens produced eye-popping, slot-machine-like returns.

[TBI note: Verge is likely one of the best performing financial assets of all time with a 1,280,000% return in 2017.]

Still, it was the exchanges who were really printing money as they morphed into bona fide casinos.

The bottom started to fall out in Q2 2018, and many token projects began dealing with shrinking treasuries and crypto funds were left with angry LP’s.

The exchanges though, kept on humming, thanks to a higher trading volume baseline than they had seen prior to the 2017 bubble.

Exactly how much did they make?

We wanted to estimate trading revenue figures of the exchanges used in our “Real 10” methodology to give you a sense of how healthy most of these businesses still are.

To compare apples to apples across exchanges, our estimates are based on the spot trading volume for the top five pairs on each exchange (which generally represent ~80%+ of volumes) and the average fees from each exchange’s pricing tiers. For Binance, where the top 5 pairs represent only ~30% of volume, we used the 2018 daily average volume reported by the company.

Overall, the ten exchanges in our sample brought in $1.74 billion in 2018 revenue, up 65% from $1.05 billion in 2017.

These rough numbers are most likely too low, though. We only included trading estimates for the top five trading pairs per platform, and we excluded fees from ancillary businesses such as listings and advisory.

You also might notice that Coinbase revenues seem much lower than expected. That’s because we only address Coinbase Pro in this particular exercise.

The core Coinbase retail business likely generated revenues an order of magnitude greater, particularly in Q4 of 2017 when most new customers were paying 1.5% buy/sell fees vs. Coinbase Pro maker/taker fees. This explains the YoY estimated jump in Pro revenues despite the fact that Coinbase as a whole likely experienced a decline in 2018.

Wait, so you’re saying that the bear market didn’t impact trading volumes?

Of course it did. But the lion’s share of 2017 revenue was backloaded, while the majority of 2018 revenue was front-loaded.

Q1 2018 was the trading peak, when Binance famously reported greater profits than 200-year old financial behemoth Deutsche Bank. The first quarter was strong enough for them and others to ensure that 2018 ended up a higher revenue year than the prior.

Bittrex and Poloniex are notable exceptions as they lost significant share to Binance in 2018. That was likely the result (at least partially) of their geographic disadvantage competing from the U.S. with an exchange model that stood on shaky domestic regulatory footing.

Indeed, the most striking takeaway from our analysis is how quickly Binance grew into the largest exchange by volume (launched in Q3’17!!!), and revenue. By capitalizing on regulatory arbitrage, Binance was able to gain a competitive advantage and list the long tail of cryptoassets where other exchanges had been hesitant for legal reasons. Binance has also been aggressive in diversifying income streams through other businesses such as Binance Research, Binance Labs, and Binance Launchpad.

Even CoinDesk lauded the company’s impressive trajectory in an op-ed earlier today. (That’s how you know CZ has been on fire.)

Binance’s “full service” offering model has proven effective and is becoming increasingly popular as exchanges look to insulate themselves from future market dips like the back half of 2018. Binance’s “Launchpad” may have spawned the new “Initial Exchange Offering” (IEO) trend, and their aggressiveness with new listings led other platforms like Coinbase to speed up their own listing processes.

Where’s the rest?

We’ll have Q1 estimates updated soon, and we’ll be working overtime to get more legitimate exchanges like OKEx and Upbit added to our “Real 10.”

Stay tuned.

And please keep in mind this study is a starting point. The numbers are estimates, so they aren’t 100% correct. We will continue to invest time and effort into creating more precise exchange models that include all trading pairs and time periods in the coming months. Particularly for the Messari Pro launch later this quarter.