2023-7-18 18:29 |
There are curious things happening with BNB, the native token of Binance. Before jumping into it, let me tell a quick story which may help illustrate how misleading certain metrics and data can be in the crypto space.
During COVID, I was working on my coding skills and decided to create a cryptocurrency for fun, mainly just to educate myself more on the back end of how blockchains work. Named TenDay Coin after the length of my quarantine sentence, I put the total supply at 500 billion tokens. I then sold one of these coins to my brother for a dollar. So let me now ask you: what was the market cap of TenDay Coin?
Technically, you could argue it was (is?) $500 billion, putting it behind only Bitcoin on a list of the world’s biggest cryptocurrencies. Move over Vitalik Buterin, because only Satoshi Nakamoto is ahead of me.
Beware of thin liquidity in the crypto marketsOf course, this is ridiculous and silly. However, this extreme example does demonstrate how market cap alone can be a misleading metric, because liquidity and volume are obviously vital factors.
Which takes us to BNB. At $38 billion, Binance’s coin is the fourth largest cryptocurrency by market cap, behind only Bitcoin, Ethereum and Tether (XRP is close following its recent surge as a result of the positive court ruling; we will ignore my coin for now..).
However, if you rank coins by liquidity, BNB falls out of the top 15. No other coin in the top 30 has such a chasm between its ranking by market cap and liquidity.
This is often the case for native tokens, which tend to have large amounts held off-market, while volume outside of the native exchange is often anaemic. As another extreme example, we saw how this played out with FTT, with the bulk of supply held by sister firm Alameda and its liquidity paper thin. While I am not suggesting that Binance is facilitating fraud on the scale of FTX (or any fraud at all, to be clear), I am merely pointing out how liquidity is a vital factor and cannot be overlooked.
The issue with Binance, as I have lamented for what feels like forever now, is that it is impossible to make any sort of confident declaration about the company given the complete lack of transparency. It operates under a clandestine cloak, and blind faith is required. Its proof of reserves is a farce, CEO Changpeng Zhao declaring that if one wants to find out about liabilities, they must “ask around”. It’s not exactly comforting.
yes, but liabilities are harder. We don't owe any loans to anyone. You can ask around.
— CZ 🔶 Binance (@cz_binance) December 7, 2022Let us not also forget that manipulative trading to boost volumes is one of the charges that the SEC has filed against the exchange. So, when considering the low liquidity of the token and the opaque nature of Binance, question marks arise around the valuation.
As another (potentially irrelevant yet still notable) caveat, we warned of unusual Solana trading volume during its meteoric run-up amid the crypto bull market. The token was outperforming everything in the sector, but liquidity was failing to keep pace with bigger coins, while the network itself was suffering from a range of issues which raised serious question marks.
As it turns out, the token completely collapsed, falling from a peak of nearly $250 to below $10 in the aftermath of the FTX collapse. Perhaps this was simply a result of Sam Bankman-Fried’s close ties to the token as an early investor, yet the other theory is that the volume in the run-up was far from natural, and the price was artificially propped up. There is also no proof any of this happened, but the fact is a conversation at all should provide investors with food for thought: so much of the crypto space is a mirage, and prices are often not what they seem. These warning signs feel more poignant for BNB than most other cryptos.
Traders are shorting BNB en masseAside from fundamentals, let us dig into some red flags that have come across my radar recently. First, as mentioned earlier, BNB’s market cap is currently $38 billion, roughly the same level at which it opened the year. In the same timeframe, Bitcoin is up 80%, demonstrating Binance’s struggles amid the regulatory crackdown, with the exchange slapped with numerous lawsuits.
Does this make sense? The last six months have been undeniably brutal for Binance. As a refresher, below are some of the allegations levelled against the exchange:
Trading against customers Violating securities law Encouraging US customers to subvert compliance controls which were designed to prevent them from using the Binance.com platform Manipulative trading to boost volumes Improperly commingling fundsAdditionally, its market share of total trading volume on centralised exchanges currently sits at 43%, down from 66% at the start of the year. That is a colossal drop, especially as fellow exchanges have also been mired in legal issues (Coinbase, Kraken, etc). Should it be trading at the same level at which it opened the year at, even as the crypto sector has bounced remarkably? Let us go on before declaring one way or another.
Coinbase vs BinanceCoinbase (NASDAQ: COIN) is a public company, meaning we have an interesting benchmark to compare Binance against. While BNB is not comparable to equity as stock in Coinbase is, it certainly has equity-like similarities, in terms of its fate being directly tied to the fate of Binance. In short, if trading volume on Binance increases, Binance does well and BNB rises. Ditto for Coinbase and the Coinbase stock.
This is a really crude comparison, but it is about the best we have. I also enjoy doing so because when Coinbase IPO’d in April 2021, it did so at a nearly identical market cap to that of BNB ($89 billion).
As the chart above shows, Coinbase has been pummeled. Prior to the positive XRP ruling this week, it was trading at $85 per share, translating to a valuation of $20 billion. Only two years ago, it was pushing for a $100 billion valuation on the day it floated.
It currently is trading at a valuation of $24 billion following a 20% jump last week, meaning it is up 213% this year. As mentioned above, BNB is flat, showing how much ground has been lost.
However, this underperformance has only come about in the last few months – prior to that, BNB had been performing remarkably well during the bear market, outpacing the torrid Coinbase stock.
In 2022, BNB lost 52% of its value, which sounds terrible. However, it was one of the very few coins to outperform Bitcoin, which shed 64%, and its performance stands out as remarkably resilient.
This outperformance now looks jarring in the context of what has transpired in the last month or so, as Binance’s legal issues have piled up. But again, has BNB fallen enough? We saw the struggles of Coinbase, and Binance has lost a massive chunk of market share compared to Coinbase. Again, this is an extremely crude comparison, and Coinbase is domiciled in the US whereas Binance is not (it still claims not to have a headquarters), but the legal issues around Binance are far more nefarious.
While we went through high-level fundamental concerns above, there appears to be unusual activity in the BNB market over the last 24 hours. Firstly, open interest in BNB has surged, currently at its highest level since 2021, as the below chart from Coinglass shows.
But even more interestingly, as the next chart shows, the BNB open interest on Binance itself has not moved much, meaning the sharp increase is flowing in on other exchanges. This means traders are loading up on BNB bets outside the Binance platform, something which is atypical.
The next natural step is to look at the funding rates, which have dipped sharply into the negative, dropping as low as -0.2%. This is the lowest level since the banking carnage in April and indicates the market is heavily short.
Could somebody know something? Cryptocurrency is notorious for its wild-west atmosphere, a space where insider information flows freely. I have zero evidence to suspect anything is untoward there, yet the BNB funding rate being so sharply negative is out of whack with the rest of the crypto market, which is currently quite placid.
Is all this a meaningless coincidence bound to regress to normal imminently? Perhaps. Then again, there is no smoke without fire.
It would also be remiss to mention that despite the laundry list of charges already levelled against Binance, there remain more still in the pipeline. Namely, the US Department of Justice is conducting a criminal investigation into Binance and a number of its high-level executives, including CEO Changpeng Zhao. Prosecutors were reportedly split before Christmas on whether they had enough evidence to file charges. Is something coming down the tracks?
This is just one theory, and again, it amounts to nothing but blind speculation on my part, which I normally don’t like to engage in. However, in a world where insider trading is so prevalent, the above funding rates and open interest certainly set alarm bells off that somebody, somewhere, may know something. And even if it is nothing, given the endless issues currently facing Binance, some of which were delved into above, I wouldn’t go near this thing with a ten-foot pole.
Binance has played fast and loose with the law for a long time, and regardless of whether you are pro or anti-crypto, or pro or anti-SEC, the reality is that the ground appears to be closing in on the world’s biggest exchange. Despite this, the BNB token continues to trade at a massive valuation, even if has been cut down significantly since its heyday.
There is plenty to be fearful of here with BNB. This is an unusual piece for me to pen as it is nothing but helpless speculation really, yet with the black hole that is Binance, it is impossible to know anything with any degree of confidence. And therein lies the problem.
The post As short selling surges & Binance legal issues simmer, is BNB overvalued? appeared first on Invezz.
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