Crypto Exchanges: Welcome to the Wild Wild East – Eric Choy
October 20, 2019 | Eric Choy, CFA
To say that it has been quite the year for cryptocurrency exchanges can be interpreted as more of an understatement to the veterans in the industry. For those “no-coiners”, meaning for those who still are only able to mutter out the word, Bitcoin, itself when asked about Bitcoin, this article might be more or less irrelevant to your interest. But I’ll say this — the plethora of exchanges bringing us never before heard or seen of derivative trading products coupled with the most redonkulous levels of leverage that only gamblers can dream of have truly put us in interesting times now. Every week for the past year has spawned a new exchange claiming to be the fairest and most innovative (with one exchange coming out boasting their 1000x leveraged product with no margin requirement nor fees). And a lot of these exchanges are coming from, you guessed it, out here in the far east, specifically China.
Now this article is not going to be summarizing the crypto exchange landscape here in China, but I just want to highlight and give you a feel for what is being played out amongst the heavyweights. China is influential all right, evident in what we see in the news on the daily basis and their impact to the world economy. Moreover, there influence in crypto is more than what people know of. Some of the top crypto exchanges are either based in China, or was based in China at one point.
With any new industry environment, especially within the crypto space where regulation is more of an afterthought, increasing cutthroat competition will bring out fierce rivalry, misleading information, and outright accusations amongst the big boys. And that’s exactly what we are seeing being played out. In particular with Binance and OKEX, where both are Chinese born, and both arguably the top crypto exchanges in the arena. (and keep in mind, for the western eye, you really don’t see or hear of public rivalry between Chinese companies, so this is quite the unique case crypto is able to pull out)
It’s understandable that these crypto exchanges are going to get called out once in a while. Ever since the hack and eventual closure of Mt.Gox back in 2014, the space has been accumulating its share of bad rap from the media and even amongst the crypto circle. Wash trading, manipulative stop outs, fake trading volume, and questionable security are the main themes that seem to swirl around when discussing about exchanges.
But let’s get back to Binance for the time being because I want to highlight a few things that OKEX has recently been calling out. (this is also meant to give you a feel of what is going on in this space)
The first being Binance’s financial profits that its been claiming to have attained. Their quarterly profits very simply can be derived by their quarterly burn of their native BNB coin. (The “burning” of coins can be thought of as when a public company buys back their stock.)
As seen in the figure above, every quarter Binance will burn a value equal to 20% of their profits. So from the latest burn of 2,061,888 BNB, a value of 36,700,000 USD, it can be derived that they earned about $185 million in Q3 2019. But the discrepancy that OKEX’s CEO has publicly called out on is how Binance is able to earn a larger profit compared to the previous quarter considering that Binance’s Q3 trading volume declined along with Binance’s trading fees being reduced.
Did they just blatantly falsify their profit numbers in an attempt to boost up their BNB coin price, which is down 54% from its June high? Or are they earning profits in other areas that are not reported? And if so, shouldn’t they transparently disclose this information to its users? In a space where decentralization is the cornerstone word, transparency should be key.
It is also very peculiar that the last three burns have all ended with an “888”. Now I know that here in China, 8 is a lucky number and superstition is well noted, but it doesn’t seem very professional to be incorporating this into your financial numbers.
Also, Binance has claimed to have a burned a total of 14,525,135 BNB coins. I’m not a mathematician either but if there is a BNB max supply of 200 million, then there should be 185,474,865 remaining, not what their website reports as 185,474,825 remaining. A minuscule difference but another questionable piece of data.
You would think Binance would try to do a better job of publishing its information out considering that earlier a week ago, Binance announced that they will soon have a on-ramp for WeChat and Alipay payments on their platform, only to have both of those Chinese payment providers swiftly rejecting those claims.
Misleading information is almost inevitable in this industry. With such lax regulation and oversight, one starts to question when will regulation come into play for these high flying derivative trading crypto exchanges. Now I’m not saying Binance is the only culprit here, but OKEX’s claims against Binance does have some credibility to it.
And let’s not forget that other exchanges also carry their dirty garbage around too. In the future, I will also analyze other exchanges and “crypto battles” unfolding. But it goes to show you that even the top players in this space are prone to questionable practices. Has this deterred people away from trading crypto? Absolutely not. In fact, the past year has seen the record number of trading volumes and active users in the space. Defying the economic sense of what is bad for you shouldn’t be bought. But people love the excitement and speculation of the crypto markets. And it’s only the beginning.