Notes 12/1: Bitcoin Price, Binance’s Simple Business Model, and Team SBF

Inflation data released this morning came in better than expected.

The core personal consumption expenditure (PCE) index rose 0.2%, less than September’s 0.3% increase. The overall PCE figures, which includes volatile food and energy prices, rose by 0.3%. The increase in inflation numbers on a yearly basis was 6%, again less than the 6.3% figure for September.

Those numbers mean that the Fed’s aggressive interest rate hikes are doing their job in tamping down inflation. They also add certainty to moderation in future rate increases, hinted at by Fed Chair Powell yesterday, in the coming months as a strategy to pummel high inflation figures.

Bitcoin prices, which have mostly responded to mainstream economic figures rather than to the churn and turmoil within crypto, sustained their hold over the $17,000 mark this morning but fell soon after. As of this writing, bitcoin is changing hands at $16,979.22, down almost 2% from a day earlier.  

There could be several triggers for the downward move: CFTC Chair Rostin Benham’s Congressional testimony about the FTX collapse, trader fears about an oncoming apocalypse in crypto, or a whale booking profits with a massive sale after yesterday’s jump.

Because this is crypto, we do not know for sure.

Binance Red Flags

The red flags are going up at Binance, the world’s biggest exchange by trading volume.

Patrick Hillman, chief communications officer at the exchange, appeared on CoinDesk TV this morning and made a series of fantastic claims about the company.

“A Very Small Percentage”  

According to him, the $2 billion set aside by it for an industry recovery fund constitutes a “very small percentage” of its corporate reserves. That must mean the company must be minting money hand over fist.

There are no publicly verifiable figures for its revenue. The top result in Google for a query about the company’s revenues states that it made $20 billion in 2020. Binance seems to have reached this figure a mere three years after its founding. Most of that period was characterized by a debilitating crypto winter during which bitcoin prices plumbed new depths.

Hillman claims that the company makes money from three sources: its trading exchange, a marketplace for nonfungible tokens (NFTs), and an investing division called Binance Labs.

Extraordinary Growth in Ordinary Times

Again, there are no publicly available numbers about the NFT marketplace. Hillman’s claim that it is successful is doubtful considering that it was launched only last year and has had to contend with a precipitous decline in prices and popularity for such tokens this year.

Even more extraordinary is Hillman’s assertion that its venture investing arm, Binance Labs, is “one of the most profitable funds in history.” A venture fund books profits after it successfully exits investments.

While the number of investments made by Binance is substantial – according to a previous TechCrunch post, the company has invested in 170 projects across 25 countries – it does not have any recorded exits.

If Hillman made this assertion with startup valuations in mind, then he might be in for a surprise. Valuations in private markets are fabulist creations, as the recent collapse of FTX – a startup valued at an eye-watering $32 billion less than three years after launch – showed.

Another fantastic claim this morning related to trading volumes. According to Hillman, Binance’s trading volumes are higher than those of the New York Stock Exchange, London Stock Exchange, and “almost” Tokyo Stock Exchange combined. That is a bold assertion. There is some math involved here but I will hold off on it for later, when I have more time.

Binance may sneak past the numbers for the mainstream exchanges mentioned by Hillman, but the quality of those volumes is suspect. Crypto exchanges are infamous for their manipulations of trading volumes and employ a variety of techniques – from bots to wash trading – to inflate their figures. What’s more, Binance seems to have achieved its distinction by listing illiquid tokens that serve no utility. In the past, it has been likened to a ”shitcoin casino.”   

A Simple Business Model

Hillman was on CoinDesk to talk about the exchange’s recovery fund for crypto projects. The long and short of the fund is that it is money set aside (and not deployed) for projects that have “good utility”, “good grasp of risk control”, and “long term vision and viability”. [FTX, a crypto project on the frontlines of innovation and regulation, might be a good candidate].

Hillman also clarified that Binance does not use BNB, its native token, as collateral. This is unlike FTX, which accepted FTT as collateral for its loans to Alameda.

Binance’s approach to BNB is different. It frequently converts the token to BUSD – a stablecoin used exclusively at Binance – to ensure reserves and cash for customers in the event of a bank run or collapse.

In other words, it converts a utility token with no inherent value into a stablecoin backed by real money. BNB and BUSD, by the way, are valued at $46.7 billion and $22.2 billion respectively in crypto markets, as of this writing.

BUSD is also the dominant component of its corporate reserves, the same money pot used to finance investments and recovery funds. No word yet on what happens to the reserves if investors suddenly make a run on BUSD.

But then, why worry about all this complexity? Binance is a very simple con, sorry, business model, Hillman explained to his audience during the interview.

Team SBF

Sam Bankman-Fried’s appearance at the DealBook summit yesterday was a media event. While he has been roundly criticized by most commentators, some people are still holding up a flag for him.

Hedge funder Bill Ackman is one. Shark Tank personality Kevin O’Leary is another. The latter was a spokesperson for FTX and claims he was “sandblasted” during that experience.

When he was asked about his future plans yesterday, SBF said he had no idea about “what I am going to do.” Given his trading chops and support from Ackman, perhaps a stint at Pershing Capital might be an option.

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