Binance Coin and Forced Buying
Binance is one of, if not the, largest cryptocurrency exchanges in the world, and generates more profit than Deutche Bank! 20% of that profit is used to rebuy BNB the native ERC-20 token of Binance. Additionally, users of Binance that pay their commission with BNB receive a discount off regular commissions according to the following schedule:
- 1st year: 50%
- 2nd year: 25%
- 3rd year: 12.5%
- 4th year: 6.75%
- 5th year: no discount
This provides two major drivers of purchases of BNB that go beyond simply speculating on the token. If we do the math based on Q1 2018 profit of $200M we find that every quarter Binance is buying $40M worth of BNB. Over the course of the year that $160M worth of BNB purchases assuming Binance maintains current levels of trade. Further we can assume that most traders on Binance will recognize the savings available by paying commission with BNB and will choose to purchase and hodl enough BNB to at minimum cover commission expenses. To simplify lets assume that 100% of Binance commission is profit, so $200M commission per quarter = $800M per year. Based on this math, and considering that Binance has enough money that it doesn't need to sell BNB, we can estimate that BNB is experiencing $160M + $800M = $960M worth of recurrent annual purchases! At a current market cap of $1600M, BNB has enough forced purchases each year to cover over half of its market cap! This is exciting and leads us to believe a lot of downside protection is available to BNB hodlers.
Further, if you are bullish on crypto you have to assume that more people are going to becoming interested in trading crypto in the future. Each of these new people that comes into the market has a high chance of being interested in trading on Binance, and therefor will need to pick up a set of BNB to reduce commissions. This means, during periods of heavy on boarding of new users at Binance there will be an influx of buyers of BNB for both commission payment purposes and speculation.
This set of observations leads me to believe there is a positive feedback loop supporting a climb in BNB value. Specifically:
- 20% of Binance profit is used to buy BNB
- Binance users buy enough BNB to pay commissions
- New Binance users buy large blocks of BNB to pay for a longer time periods worth of commissions
- Speculators buy BNB when new users onboard
Disclosure: I am long BNB