Update at 25 April 2018: Model updated following 15 April BNB Burn

Updated Model here.

The outlook for Binance is positive. I base this on three factors:

Exchange volumes remain on a parabolic uptrend drawn on a logarithmic scale. That said, the bear market in Q1 2018 has had a negative effect on volumes.

2. In mid-July 2018 the discount for paying fees in BNB falls from 50% to 25%. i.e. The discounted fee rises from 0.05% to 0.075%. There will be a 50% increase in Binance revenue as a result.

3. The model I wrote neglected an income source that could become significant, namely income from their VC arm BinanceLabs. MobileCoin, a cryptocurrency from the creator of Signal, just raised $30M for mobile payments: Techcrunch

Update at 15 March 2018: About the Binance Chain DEX announcement:

Binance announced that it will create Binance Chain and will provide a decentralized exchange (DEX) that handles transactions through an automated process, eliminating the need for a third party to hold and trade funds.The Binance Coin (BNB) will be upgraded as a native coin to Binance Chain. BNB is presently an ERC-20 token and those tokens will be swapped for the new coin. More coverage of this at Bloomberg. This move increases the scope of the BNB coin. It will play a similar role to ETH (used for GAS payments) in the new structure.

How does that affect revenue streams and therefore a fair valuation of BNB Coin? There will be no immediate effect on revenues, but this move future-proofs Binance against the likely trend away from centralised exchanges to DEXs. The DEX market is currently tiny. The largest DEX is IDEX which is placed at 68 in exchange volumes and has a volume of $6 million at time of writing.

The announcement also raised the possibility of an additional two revenue sources that were neglected in the main analysis (below). They are Binance Labs (a blockchain technology incubator) and Binance Info.

Update at 13 March 2018: Asked to dinner by CZ!

Update at 11 March 2018:

This analysis — Chasing Fake Volume — suggests volumes at Binance might be over-stated by ‘wash trading’. i.e. Their true volume might be just 30% of their claimed volume.

If Ribes is correct then Binance’s Revenue from trading fees will be only 30% of that estimated by my model, i.e. Annual Revenue (Revised) is about 30% of $825 million = $247 million or, Quarterly Revenue is 30% of $206 million = $62 million.

This revised Revenue figure of $62 million for Q2 is absolutely incompatible with the Quarterly Profit at the Q2 Buyback at 15 January 2018. Profits in Q2 are estimated to have been $189,353,000.

There are only two possible solutions to this inconsistency. a) The volumes claimed by Binance Exchange are valid and the model of Sylvain Ribes fails in this case, or b) The Q2 Buyback was rigged, and Binance bought many more $BNB that they should have done according to their stated intention to use 20% of profits to buyback $BNB.

Update at 3 March 2018: CZ revealed in a post on LinkedIn that Profits in Binance Exchange’s Q3 (15 January 2018 to 15 April 2018) are expected to exceed those in Q2. (15 October 2017 to 15 Jan. 2018).

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Here is the real-time Binance valuation calculator. It is a Google Sheet that brings in live volumes data required to calculate Binance Exchange Revenues, and calculates Profit and Fair Value of Binance Exchange, and Fair Value of Binance Coin ($BNB). It is accessible from my crypto analysis site Blocklink.info:

Crypto analysis at Blocklink.info

When you have read this valuation model for Binance Coin ( $BNB ) you will want to buy it. Buy Binance Coin.

Model for Calculating Binance Exchange Revenue

Binance Exchange has these sources of income: a) Trading Fees b) Withdrawal Fees c) Coin Listing Fees d) Profit from cryptoasset investments.

Binance does not yet offer margin trading so it receives no Lending a.k.a. Funding Fees.

This model analysis excludes any consideration of Withdrawal Fees and Listing Fees and Profit from cryptoasset investments in its estimates of Revenues. (The Listing Fees is rumoured to be 35 BTC but no hard information is available about this. Is this Listing Fee a one-off fee, or does it recur annually?) But the model’s estimates of profit are derived directly from Quarterly BNB Buyback and Burn data whch reflects all sources of income. Therefore the estimate of revenue is an under-estimate and the profitability (Net Income / Gross Income) is overstated.

Trading Fees

Binance charges 0.1% to both sides for fees paid in all coins excl. BNB. Traders receive a discount for paying fees in BNB.

Average fee paid is assumed to be 0.065% (by both sides). It is a little higher than the minimum 0.05% (fee applicable to payments made in BNB) to account for possibility some traders pay in other currencies (where fee is 0.1%), and also for the fact that minimum fee will be 0.075% from July 2018.

Binance is currently at Number 1 spot in all crypto exchanges, with daily volume at time of writing (22 February 2018) sitting at around $2 billion. (As matter of interest, Bitmex Exchange is seeing larger volumes than this, but its volumes are not listed at Coinmarketcap.)

Annual Revenue = Daily exchange Volume x 0.13% x 365 = $953 million.

Estimates of Annual Revenue are always updated in real-time in the spreadsheet.

Model for Calculating Profit and Fair Value of Binance Exchange and Binance Coin ($BNB)

Every quarter, Binance Exchange will use 20% of its profits to buy back BNB and destroy them, until they buyback 50% of the BNB total Supply (i.e. 100 million). All buy-back transactions are announced on the blockchain. They will eventually destroy 100 million BNB, leaving 100 million BNB remaining.

Implied Annual profit at time of Q2 Burn = Burn Q2 (USD) x 5 [as it is 20% of profit] x 4 [as it is Quarterly value]

Here is CZ performing the Q1 Burn.

Implied Market Cap of Binance Exchange = Implied Annual profit at Q2 Burn x 51 = $38,628 million

Implied Market Cap of Binance Coin = Implied Market Cap of Binance Exchange x 20% = $7,726 million

Implied Fair Price of BNB Coin = Implied Market Cap of Binance Coin / Circulating Supply = $78

or

Implied Fair Price of BNB Coin = Implied Market Cap of Binance Coin / Total Supply = $39

It is arguable that this model’s estimate of the fair price of $BNB is too low for two reasons.

It is based on volumes in the period from mid-October 2017 to mid-January 2018 and makes the implicit assumption of zero growth in trading volumes thereafter. Crypto trading volumes are on an inexorable rising trend and so are likely to increase from these levels. Here we see the time-series chart for global exchange trading volumes for BTC.

Source: Coinmetrics.io

2. Binance will add a significant new revenue source (30% to 40% of total revenues in the case of Bitfinex) according to its roadmap, namely Margin Lending Fees when it introduces Margin Trading.

From the White paper.

Note that Schwab’s interest income from margin loans to customers has traditionally been about half of its income from trading commissions.

Binance is almost certainly the fastest startup to achieve unicorn status (private company with $1bn+ valuation) AND to make a profit in history. (Other unicorns were all in the red at such an early stage.) It has achieved this status within SIX MONTHS from its launch in July 2017. And the amazing thing is that there is the opportunity for ordinary people to buy equity in this company at this early stage by buying Binance Coin.

Here, by comparison, are household names that reached unicorn status much more slowly and without achieving profitability. More information on this in this Medium piece by San Eng of Digital Alchemy Holdings.

Predictions for the Q3 Burn (15 April 2018)

Reasons Burn (Q3) might exceed Burn (Q2)

Referral commission was 50%, but was reduced to 20% on 8 January 2018. So the net fees earned by Binance will be higher ceteris parabus.

Reasons Burn (Q3) might be lower than Burn (Q2)

If investments in cryptoassets are a source of profit for Binance Exchange, then it is likely that the Mark-to-Market vaue of those investments in mid-April 2018 will be lower than in mid-January, given that the crypto market was at an All Time High in mid-January.