Disclosure: Multicoin Capital owns BNB tokens. For ethical reasons, Multicoin Capital abides by a “No Trade Policy” for the assets listed in this report for 3 days (“No Trade Period”) following its public release.
Your margin is my opportunity.
-Jeff Bezos, Founder and CEO, Amazon
Binance is the crypto exchange that best exemplifies Bezos’s famous quote. The industry leading exchange charges the lowest fees in the industry as a strategy and competitive advantage. Similar to Amazon, Binance’s strategy is to use low prices to bootstrap a powerful network, and generate profits with scale. Today, Binance is the top volume exchange for 82% of the top 50 tokens and 36.6% of spot trading volume occurs on Binance.
Exchanges are one of the few businesses that have strong network effects. Liquidity attracts more liquidity. That is why most nations only have one dominant stock exchange, as this is the natural market equilibrium. Given the international nature of crypto trading, there is natural pressure towards one dominant global crypto-to-crypto exchange. An aggressive player that captures the market early will become more entrenched as the market matures.
Binance is by far the most aggressive crypto exchange. It has exploded over the last 18 months to become the dominant global crypto exchange, and they’re not slowing down. Rather, they’re launching ambitious new growth initiatives to strengthen their network effects. The two most important such initiatives are 1) launching fiat currency support – which will be launching in 10 nations across five continents in 2019 (until recently, Binance did not support any fiat pairs), and 2) releasing Binance DEX, a powerful new decentralized exchange (DEX), which we expect will become the dominant DEX shortly after launch in the first half of 2019. Binance’s leadership sees the enormous opportunity in front of them and is moving quickly to conquer the market before anyone else can.
Binance is a mobile business and has taken advantage of this to execute a regulatory arbitrage strategy by moving to the most regulatory-friendly jurisdictions. They have changed jurisdictions five times in the history of the company, starting in Hong Kong, followed by Singapore, Japan, Taiwan, Cayman Islands, and finally settling in Malta. With a foundation in Malta, Binance is setting up hubs around the world anchored by 10 fiat-crypto exchanges in 10 separate jurisdictions, making the business resilient to any given regulator.
Suffice to say we’ve been following the rise of Binance and Binance Chain closely. Binance Chain features a permissionless decentralized exchange that will allow anyone anywhere in the world to trade any token. If successful, the implications of such an exchange would be extremely meaningful to the entire crypto ecosystem.
Binance understands the power of blockchain to enable new disruptive models for economic activity. This is why they announced that “Binance will transition from being a company to a community” when they announced Binance DEX. We expect that the value created by Binance DEX will be captured in the BNB token rather than Binance equity – allowing users to directly participate in the economics of the platform without any barriers. We believe that Binance will be the first for-profit corporation to start out centralized, achieve meaningful scale, and ultimately decentralize itself to become the first internet-sovereign organization, and the largest decentralized autonomous corporation (DAC).
Given that Binance has the industry’s lowest fees, the widest global reach, and the highest volumes, we believe that it’s the frontrunner in the race to be the world’s dominant crypto exchange. We also believe that Binance’s token, BNB, is dramatically undervalued, primarily because it is a novel asset with properties that many investors do not yet fully appreciate.
In 2018 Binance returned $88M to BNB investors through a buy-and-burn mechanism (analogous to a stock buyback). The current fully-diluted valuation of the BNB token is $1.9B, which implies a 4.6% yield. However, it is key to note that BNB is not a typical share in a typical company and there are material differences which we cover in our report.
BNB’s value is driven by more than the cash being returned to investors by Binance. BNB has tremendous utility and is used as:
In sum, all of these factors must be considered when valuing BNB. In our full analysis we explore Binance’s business strategy, the DEX market and its competition, and propose a framework for valuing BNB.