Notes 12/15: CZ’s Simple Business, Bitcoin Price and Miners

Binance CEO Changpeng Zhao (CZ) made an entertaining appearance on CNBC’s Squawk Box this morning to distinguish his exchange from FTX – the latest poster child of crypto greed and dysfunction.

CZ told the show’s hosts that Binance does not owe money to creditors and does not have venture investors. “We also don’t have loans to other people that we depend on,” he said, adding that the exchange was a “very simple, very self-contained type of organization.”

And where does the revenue for this self-contained organization come from? Trading fees, apparently. [CZ’s chief communication officer would disagree with that simplification of the firm’s extensive business operations]. He also denied commingling customer funds with other sources.  

Binance As A Crypto Representative

The exchange is a prime example of crypto’s opacity. No one knows who owns it. Its initial coin offering (ICO) in 2017 raised $15 million but investor information is absent. BNB, the exchange’s native tokens, were on sale during the offering, but most of them are controlled by Binance wallets. Like Tether, it is yet to submit its financials to a comprehensive audit.  

Binance has also been accused of faking figures and employing deceptive practices to pump up engagement numbers earlier. Still, CZ told CNBC that Binance was able to make a $500 million investment in Twitter because it had enough revenues.

There was enough customer money [to make the investment],” he said.

I wonder what SBF would make of that sentence.     

Mr. Wonderful Becomes A Liar  

But CZ saved his best words for Mr. Wonderful Kevin O’Leary. O’Leary appeared before a Senate Committee yesterday and blamed Binance for FTX’s collapse.

CZ called O’Leary’s theories “a bunch of nonsense claims.” “I think Kevin’s a liar,” he said and pointed out to his “special relationship” with FTX’s disgraced former CEO Sam Bankman-Fried (SBF).

I am not a fan of O’Leary’s special appearance in the crypto movie either, but the man did not lie yesterday. As the world’s biggest crypto exchange by trading volume, Binance occupies a special place on the crypto island and it is difficult to believe that it has escaped unscathed from FTX’s seismic collapse.

What Happened to Binance’s FTT?

CZ reportedly also had a chummy relationship with SBF and participated in group chats with him before they fell out. Their friendship extended to business interests: Binance was an early investor in FTX.

According to bankruptcy filings, SBF bought out Binance’s stake for $2.1 billion in 2021. In today’s interview, CZ told CNBC that SBF bought out Binance’s stake using a combination of Binance USD (the exchange’s stablecoin), BNB (its native token), and FTT (FTX’s native token). “A big chunk of it (FTX’s buyout] was in FTT tokens,” said CZ.

Now there’s an interesting claim. There’s the question of why Binance chose to accept FTTs, instead of its own token or stablecoin, for the transaction. Perhaps, it was a crisis of confidence. But both tokens were and continue to be equally worthless, their prices subject to speculative whims.  

Then there’s the question of Binance’s lousy trade. For most of 2021, FTT traded at fairly high notional prices. This was also a time when FTX and the broader crypto markets were on a roll. Bitcoin price set two records in the same year.

Among other perks, the token offers discounts on trading fees and special rewards and interest rates for staking members of the exchange. But Binance did not sell or use the token in any way. “We never touched it,” said CZ. They watched the token’s notional price and crypto markets stagger downwards and sold near the bottom. So, they bought high and sold low.

That’s smart trading strategy.

Bitcoin Price Falls Again    

For a moment there, it seemed that bitcoin price had broken free of its downward trend. The cryptocurrency’s price edged past the $18,000 figure yesterday but fell back again into the familiar range of between $16,000 to $17,000 this morning. As of this writing, it is trading at $17,401, down 2.27% from its price a day earlier.  

The ostensible reason for a decline in the price is the Fed’s interest rate hike. Or it could be the culmination of a Tether-induced price bump. Either way, the future does not look too good for bitcoin.

A $10,000 Bottom

Matthew Siegel, head of digital assets research at investment firm VanEck, says bitcoin price will bottom out at a range between $10,000 to $12,000 in the first quarter of next year because many bitcoin miners will become bankrupt by then. “With bitcoin mining largely unprofitable, given recent higher electricity prices and lower bitcoin prices, we predict many miners will restructure or merge,” he wrote.

Miners are already selling their bitcoins in droves to cover operating costs. Blockchain analytics firm Glassnode found that the balance held in miner wallets declined by over 25,000 bitcoins since July to 1.818 million. Their losses and declining stock prices have also constrained the ability of miners to make profits.    

A Question of Hash Rates

A consolidation amongst bitcoin mining outfits is an inevitable consequence of the industry’s maturation. It will be interesting to note the industry’s final shape. Some publicly traded bitcoin mining firms seem to be doing a better job than others due to their location.

For example, Canada-based Hut8 said its average cost of mining fell by 29% relative to the second quarter of 2022 due to favorable power rates. The company also increased its mining capacity by 10%.  

U.S. – based Stronghold mining doesn’t seem to have had the same luck. It had to give up its collateral of mining machines to New York Digital Investment Group (NYDIG) to pay back its loans.

The silver lining to this is bitcoin’s hash rate or the amount of computing power devoted to mining the cryptocurrency. It has climbed in contrast to the declining price. I am guessing that increase is concentrated amongst very few miners. They will become part of the levers that instigate bitcoin’s future price movements.

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