When it comes to cryptocurrency exchanges, Binance is the clear leader. At Bitcoin Market Journal, we now see an investment opportunity in Binance Coin (BNB), which we expect to rise in value as a result of Binance resuming U.S. operations with the launch earlier this week of Binance.US as an independent company. We will explore our rationale for this prediction throughout this article.

Based in Malta, the Binance exchange currently has more daily verified trading volume than Taiwan-based Bitfinex, U.S.-based Kraken, and Europe-based Bitstamp combined. Despite holding this dominant position, back in June, Binance placed a self-imposed moratorium on U.S. users from trading on their global platform, possibly due to regulatory concerns.

To address this limitation, Binance announced on September 18 that it was opening Binance.US and began accepting deposits and registrations in 37 states. Of the 13 states excluded, the most notable are New York, Texas, and Florida. Interestingly, prior to June, only 6 states had been prevented from participating. 

As part of what is described as a “gradual rollout,” the exchange will initially support (no surprises here) bitcoin (BTC), Ether (ETH),Ripple (XRP), Litecoin (LTC), Bitcoin Cash (BCH), and Tether (USDT), in addition to Binance’s own token (BNB). What is perhaps surprising is that although one stablecoin, Tether, is supported, Binance’s own dollar-linked stable coin initiative (BUSD), which was also launched this week, is not (at least initially) supported. 

After joining several early blockchain projects, including a digital wallet provider and a platform for trading between traditional and digital currencies, Changpeng Zeng (a.k.a. “CZ”), identified two clear pain points in the world of digital trading:

As a solution to these two challenges, CZ envisioned a revolutionary exchange, which he named Binance, in which bitcoin and altcoins could be traded, i.e. a blockchain stock exchange.

Binance’s rise to prominence was driven by the brilliant solutions to the two aforementioned pain points as noted by CoinDesk editor-in-chief Pete Rizzo:

As a result, after launching in mid-2017, Binance was perfectly positioned to add new altcoins to meet the growing market demand. 

As a funding mechanism for Binance, CZ launched his own altcoin, which he would call Binance Coin (BNB). The timing of this launch with the corresponding explosion of altcoins resulted in BNB increasing in value 300 times, making Binance a $3.5 billion company in under two years and generating enormous wealth for CZ.

In creating the BNB token, Binance essentially minted its own “in-game currency.” In order to encourage user adoption and loyalty, they incentivize paying trading fees in BNB by offering a discount. In 2019 alone, the price of BNB has increased by over 250 percent. As a result, not only are they encouraging user “lock-in,” but they are also encouraging investors to employ a strategy of buying and holding (HODL in blockchain vernacular) BNB.

Further, Binance built an Initial Exchange Offering (IEO) platform that enables project funding through the launching of new blockchain tokens. As an analogy, think of an IPO in which shares of stock are offered on a foreign stock exchange, denominated in that same foreign currency. 

Whether the IEO model becomes sustainable (which we question) or turns out to be a passing fad (which we suspect) is still unclear, but we do know that each successive IEO on the Binance platform has been correlated with an upward trend in the price of BNB.

According to CoinMarketCap, there are currently over 250 digital exchanges, but none have duplicated the success of Binance, and most are struggling to add new coins. Further, a report created for the Securities and Exchange Commission by Bitwise aroused suspicion that the trading volumes reported on many exchanges were being artificially inflated due to automated “wash trading.”

In order for an exchange to thrive, a critical mass of both buyers and sellers on each end with market makers in the middle is needed. To support this balance, market making is often an essential element. However, this practice can potentially artificially increase demand and prices, luring in unsuspecting users under false pretenses. If you are interested in learning about both ethical and unethical market making practices in the crypto space, click here. 

Although many exchanges have tried to duplicate the IEO model, an inevitable point will be reached in which the growth in the number of new users will slow dramatically. Given the need for consistent trading volume, there will be an inevitable “thinning of the herd” in which a significantly smaller number of exchanges are likely to remain viable. 

Of the thirteen states that are (at least initially) excluded from this opportunity, New York is not surprisingly the one making the headlines. In terms of workarounds, it isn’t as simple as crossing the river (New Jersey is included; Connecticut is not) to find a state in which to establish an internet connection. As part of KYC, you will need to show a driver’s license or passport demonstrating residency in an approved country or state. However, Binance has stated that these exclusions are part of the gradual implementation and are not meant to be permanent.

Research has consistently shown that investors in bitcoin and altcoins have strong concerns about losing their investments due to nefarious activities. Binance has previously employed user protection through a Secure Asset Fund for Users (SAFU). As a result, all Binance investors who were impacted by a $40.7 million hack in May were properly compensated for their losses. Although specific details have not yet been provided, Binance has publicly stated that Binance.US will also be committed to providing the appropriate protections for their users. 

Users in the United States who have not been able to trade since June will not automatically see their accounts transferred over to Binance.US. Binance.US is a distinct entity run by a service that is registered in the United States with the Financial Crimes Enforcement Network (FinCEN).

Users on Binance.US will enjoy a clear fee structure with trading fees of one-tenth of one percent (0.10%) with corporate account fees varying by volume. 

Finally, although there are only the aforementioned digital currencies currently supported on the exchange, domestic users can expect to have significantly more options in the near future as Binance.US has stated their intention to add new altcoins that pass their digital asset risk assessment framework. 

At Bitcoin Market Journal we never make guarantees, nor do we tell you what and when to buy or sell. However, just as we predicted the rise in both the value of Facebook and bitcoin shortly after the Libra announcement, we now predict a rise in the value of BNB. Despite the current limitations of the exclusion of New York and limited fees until sufficient liquidity is attained, we still see many of the same factors, proper incentivization and ease of scaling, that led to the initial rise in BNB as still being relevant here. Even though there will be a no fee period until November, the expectation of an increase in trading volume from the new user onboarding should continue to drive demand for BNB. Therefore, we are predicting an ongoing appreciation in value.

 

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