A peculiar thing about cryptocurrencies is that it’s difficult, if not impossible, to figure out their actual value, despite having a market capitalization thought to be around $120 billion or more.
For the most part, they can’t be valued like a company stock or a bond. An exception is BNB, a token issued by Binance in 2017. The popular crypto-trading exchange used it to raise $15 million. By one method of analysis, it’s around 1,000 times overvalued.
Binance created its digital coin in an initial coin offering (ICO) that ran during the week ending July 3rd, 2017, just as the digital asset gold rush was beginning to boom in earnest. ICOs sound kind of like an initial public offering, but they’re typically not approved or vetted by government watchdogs and are much less regulated.
A stock market share provides ownership in a company that has assets (such as buildings, computers, factories, intellectual property, and cash), hopefully earns profits, and may pay a dividend. An investor can model cashflow, project that into the future, and systematically arrive at an estimated stock price.
Widely traded crypto tokens like bitcoin and ether don’t represent a share in a company, or a claim on future cashflows, which is why they can’t be valued like a security. The same goes for ICOs, which function sort of like crowdfunding. Most ICO tokens aren’t useful for much besides speculation—that is, the tokens don’t provide a function. But in some cases, traders receive utility tokens in exchange for funding. It’s sort of like buying coupons for cups of coffee to help a cooperative start a new café. That’s what makes Binance’s BNB token interesting.
The crypto token stands out because it actually does something: It provides a discount for trading on the Binance exchange, sort of like a price-reduction coupon. With some simple math, we can analyze whether the crypto token, which has functional utility value, is over or under valued.
So what are BNB holders entitled to?
Binance is one of the biggest crypto exchanges in the world, and spun off around $446 million in profit last year, according to data compiled by The Block. BNB token holders don’t receive any of that money—the tokens don’t represent a share of the enterprise—but they do get a discount if they trade on the exchange.
While Binance has been working on expanding the uses for its token, the main one for now is the discount. Using that information, we can make a few assumptions and model the token’s worth. You can, in economist speak, arrive at an approximation of a real valuation for BNB, at least according to this parameter.
Quartz finds an intrinsic, utility value for BNB that is almost certainly less than 1 cent, and potentially even less than that. That’s less than 1% of its $9.65 trading value, according to prices on Coinmarketcap. Over time (less than four years), looking at this parameter alone, its value will decline to zero because the BNB token will eventually cease to provide a trading discount on the exchange. Even the original issue price for BNB—around 10 US cents—is higher than its intrinsic, fundamental value, based on this style of analysis.
Figuring out an exact valuation for BNB (pdf) is tricky. But with some simple assumptions we can figure out a kind of baseline value. Any additional value on top of that is pure speculation.
- When Binance had its ICO in July of 2017, customers using BNB to pay for their transactions were told they would get a 50% discount for the following year. The transaction fee discount was scheduled to be reduced to 25% for the second year, to 12.5% the following year, to 6.75% for the fourth year, and the discount will disappear during the fifth year. We are now in the second year, so it is currently 25%. It follows that if the fee was 0.1% of the transaction value using bitcoin (the exchange didn’t accept fiat currency when it started), it would only be 0.075% if paid fully in BNB.
- Let’s assume that about $1 billion in trading takes place on the Binance exchange every day (a generous assumption based on press reports and Coinmarketcap). It charges a fee of 0.1% on all transactions (less for larger trades). That means that, every day, there is about $250,000, at current prices, to be saved by using BNB rather than some other cryptocurrency for transactions ($1 billion multiplied by 0.025%). There are currently about 191 million BNB in circulation.
- On a given day, any BNB not used for payment is a waste of its intrinsic value. If we assume that everyone who holds BNB on a given day should either use the currency, or sell it to someone who will, then we have a market where there is $250,000 dollars in savings to be had, and 191 million coins. Economic theory suggests that, in a perfect market, with many traders, each BNB should sell for around 0.13 cents, or $0.0013. (Note: this calculation assumes each BNB can only be used once per day. This is not exactly true, but a useful abstraction. Using it multiple times would actually lower the coin’s value.)
- The person who holds onto her BNB tokens is then speculating that they will be worth more in the future. This is certainly possible, but there are challenges to this assumption. Unless Binance invents a new service for BNB coins (see below), the only way for BNB’s value to meaningfully increase would be if the volume of trading on Binance skyrockets. (Instead, it’s been falling the past year.)
- If trading on Binance jumped from $1 billion to $10 billion next month, this would increase the value of BNB because more people would want to use it for transactions. But even with a tenfold increase in volume, BNB still shouldn’t be worth anywhere close to $9. If you believe that the volume of transaction will grow and increase the BNB’s value, it has to happen fast because the value of the discount decreases every year and eventually disappears.
- Binance has said it will use profits to buy back and destroy BNB until half of the outstanding tokens are gone. The declining supply doesn’t influence the value very much, given that they expect to keep at least 100 million coins in circulation. (If Binance cut the supply in half, by our calculation, that would only double its value, which would mean it would still be worth less than a cent.)
- One possible way the token’s value could be inflated is if Binance is willing to buy back coins at rates well above their actual utility value (which seems to be happening).
The story doesn’t quite end there, but everything from here is speculative. The person who holds onto her BNB tokens is gambling that they will be worth more in the future. That’s probably why Binance is working on creating new uses, and its website lists around 20 of them, including virtual gifts and ways to pay a credit card bill using BNB tokens. This use case is pretty similar to what’s envisioned by bitcoin—it’s a means of payment, and perhaps a store of value. But bitcoin isn’t widely adopted for payments, and high volatility makes it a poor store of value. For most purposes, it hasn’t become a currency, and its price appears to mainly be derived from speculation.
Binance says it has other plans for BNB, and, at this point, it’s worth taking a moment to slow down and note how ether (ETH), Ethereum, and ICOs fit together.
The BNB token was created using Ethereum, a network of computers which receive ether tokens as a reward for computing power and securing the network. The set up is similar to how bitcoin miners are rewarded with bitcoin for driving that particular network. Ethereum has been popular as the computing platform to create crypto tokens for ICOs, including Binance’s in 2017, which usually raise funds in ether.
Binance is working on something that sounds like a lot like its own version of Ethereum. Changpeng “CZ” Zhao, Binance’s CEO and founder, said in a livestream the exchange plans to move its token from Ethereum, and onto its own, new blockchain called Binance Chain. The computers that operate in that network would be compensated in BNB coins instead of ether, and likewise ICO projects would be able to raise funds in Binance’s native BNB token.
Binance also plans to use this new customized blockchain for a decentralized exchange. Its current platform is a centralized venue that holds its customers’ tokens so that they can buy and sell with each other. The idea behind a decentralized exchange, on the other hand, is to allow users to trade directly with each other, without ever handing their assets over to a central party. This setup would be safer, the thinking goes, because there’s no honeypot in the middle to attract hackers.
Will Binance’s decentralized exchange, and its own custom blockchain, provide a viable utility or use for BNB coins? It’s impossible to know. The intrinsic value of Ethereum, and the ether gas that fuels it, is difficult to ascertain, and the same would be true of Binance Chain. BNB tokens could, perhaps, provide a valuable discount for trading on the new exchange, assuming the trading platform is popular and depending on how much the discount is worth.
Unless BNB provides a new discount for trading, there’s no equity investment, no cashflow that goes to the investor to analyze, and little else that can be systematically modeled to come up with a future projection. So far, it looks like new and better ways to speculate on prices.
Please send news, tips, and crypto valuations to firstname.lastname@example.org. Today’s Private Key was written by John Detrixe, Dan Kopf and Matthew De Silva, and edited by Oliver Staley. On matters of style, swim with the current; on matters of principle, stand like a rock.